Full text of "Mergers and competition in the telecommunications industry : hearing before the Committee on the Judiciary, United States Senate, One Hundred Fourth Congress, second session ... September 11, 1996"

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S. Hrg. 104-862

MERGERS AND COMPETITION IN THE
TF! FCOMMUNICATIONS INDUSTRY

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o4-gfc^ I HEAEING

BEFORE THE

COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE

ONE HUNDRED FOURTH CONGRESS

SECOND SESSION

EXAMINING RECENT DEVELOPMENTS IN THE TELECOMMUNICATIONS
INDUSTRY, FOCUSING ON THE STATE OF COMPETITION IN THE TELE-
COMMUNICATIONS INDUSTRY AND THE APPLICATION OF ANTITRUST
LAWS WITH REGARD TO CERTAIN MERGERS

SEPTEMBER 11, 1996

Serial No. J-104-95

Printed for the use of the Committee on the Judiciary

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DOCUMENT

U.S. GOVERNMENT PRINTING OFFICE
40-670 WASHINGTON : 1997

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-055116-1

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S. Hrg. 104-862

MERGERS AND COMPETITION IN THE
TELECOMMUNICATIONS INDUSTRY

GOVDOC
4. J 89/2:S.H]

04- gfc3 I HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE

ONE HUNDRED FOURTH CONGRESS

SECOND SESSION

SEPTEMBER 11, 1996

Serial No. J-104-95

Printed for the use of the Committee on the Judiciary

, _ BOSTON PUBLIC uSRhrT'^' s , aw^!5|^

GOVERr^MENT COCUMtf^lTS UES'^ARTftftEr^T \ ^^^ LIBRARY

MAR 8 2000

U.S GPO

DEPOSITORY

DOCUMENT

U.S. GOVERNMENT PRINTING OFFICE
40-670 WASHINGTON : 1997

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-0551 16-1

1 rsLl O - A

COMMITTEE ON THE JUDICIARY

ORRIN G. HATCH, Utah, Chairman

STROM THURMOND, South Carolina
ALAN K. SIMPSON, Wyoming
CHARLES E. GRASSLEY, Iowa
ARLEN SPECTER, Pennsylvania
HANK BROWN, Colorado
FRED THOMPSON, Tennessee
JON KYL, Arizona
MIKE DeWINE, Ohio
SPENCER ABRAHAM, Michigan

Mark R. Disler, Chief Counsel

Manus Cooney, Staff Director and Chief Counsel

Cynthia C. Hogan, Minority Chief Counsel

Karen A. Robb, Minority Staff Director

JOSEPH R. BIDEN, Jr., Delaware
EDWARD M. KENNEDY, Massachusetts
PATRICK J. LEAHY, Vermont
HOWELL HEFLIN, Alabama
PAUL SIMON, lUinois
HERBERT KOHL, Wisconsin
DIANNE FEINSTEIN, CaUfornia
RUSSELL D. FEINGOLD, Wisconsin

(II)

CONTENTS

STATEMENTS OF COMMITTEE MEMBERS

Page

Hatch, Hon. Orrin G., U.S. Senator from the State of Utah 1

Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont 2

Thurmond, Hon. Strom, U.S. Senator from the State of South Carolina 4

Simon, Hon. Paul, U.S. Senator from the State of Illinois 6

Feingold, Hon. Russell D., U.S. Senator from the State of Wisconsin 32

Simpson, Hon. Alan K., U.S. Senator from the State of Wyoming 80

CHRONOLOGICAL LIST OF WITNESSES

Panel consisting of James R. Young, vice president and general counsel.
Bell Atlantic Corp., Arlington, VA; James D. Ellis, senior executive vice
president and general counsel, SBC Communications, Inc., San Antonio,
TX; and Bernard J. Ebbers, president and chief executive officer, LDDS
Worldcom, Jackson, MS 11

Panel consisting of Michael H. Salsbury, executive vice president and general
counsel, MCI Communications Corp., Washington, DC; William P. Barr,
senior vice president and general counsel, GTE Corp., Stamford, CT; and
Robert C. Atkinson, senior vice president, legal regulatory and external
affairs, Teleport Communications Group, Inc., Staten Island, NY 44

Panel consisting of Peter W. Huber, senior fellow, Manhattan Institute for
Policy Research, New York, NY; Robert W. Crandall, senior fellow, Brook-
ings Institution, Washington, DC; Ronald Binz, President, Competition Pol-
icy Institute, Denver, CO; and Dale N. Hatfield, chief executive officer,
Hatfield Associates, Inc., Boulder, CO 70

ALPHABETICAL LIST AND MATERIALS SUBMITTED

Atkinson, Robert C:

Testimony 60

Prepared statement 62

Attachment 1 — Interconnection performance monitoring 64

Attachment 2 — Summary of NYNEX performance for TCG (Jan.

1994-March 1996) 64

Barr, William P.:

Testimony 58

Prepared statement 59

Binz, Ronald:

Testimony 82

Prepared statement 83

Crandall, Robert W.:

Testimony 75

Prepared statement 77

Ebbers, Bernard J.:

Testimony 26

Prepared statement 26

Ellis, James D.:

Testimony 15

Prepared statement 16

Attachment 1 — Background information about SBC and PacTel 22

Attachment 2 — Trends in long distance rates and exchange access

charges 23

Attachment 3 — Competitive access providers in Southwestern Bell
Telephone Company's territory 24

(III)

Page

Hatfield, Dale N.:

Testimony 90

Prepared statement 91

Huber, Peter W.:

Testimony 70

Prepared statement 72

Salsbury, Michael H.:

Testimony 44

Prepared statement 46

Thurmond, Hon. Strom: Prepared statement of David Turetsky 7

Young, James R.:

Testimony 11

Prepared statement 12

APPENDK

Questions and Answers

Responses of James R. Young to questions from:

Senate Committee on the Judiciary 101

Senator Thurmond 101

Senator Leahy 103

Senator Feingold 106

Responses of James D. Ellis to questions from the Senate Committee on

the Judiciary 107

Responses of LDDS WorldCom to Senators' questions 108

Responses of Robert C. Atkinson to questions from:

Senator Hatch Ill

Senator Thurmond Ill

Senator Feingold 113

Responses of Peter W. Huber to questions from:

Senator Hatch 118

Senator Thurmond 122

Senator Leahy 123

Responses of Robert W. Crandall to questions fi-om Senator Hatch 124

Responses of Ronald Binz to questions from:

Senator Hatch 124

Senator Thurmond 125

Senator Leahy 127

Additional Submissions for the Record

Prepared statement of Judy Brewer, Massachusetts Assistive Technology
Partnership Center 128

Prepared statement of Barbara O'Connor, California State University, De-
partment of Communications Studies 129

Letter to Senator Hatch from James Q. Crowe, chairman and chief executive
officer, MFS Communications Company, Inc., dated Sept. 25, 1996 132

MERGERS AND COMPETITION IN THE
TELECOMMUNICATIONS INDUSTRY

WEDNESDAY, SEPTEMBER 11, 1996

U.S. Senate,
Committee on the Judiciary,

Washington, DC.

The committee met, pursuant to notice, at 2:08 p.m., in room
SD-G50, Dirksen Senate Office Building, Hon. Orrin G. Hatch
(chairman of the committee), presiding.

Also present: Senators Thurmond, Simpson, Grassley, Leahy,
and Feingold.

OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S.
SENATOR FROM THE STATE OF UTAH

The Chairman. Good afternoon. I would like to thank our distin-
guished panelists for joining us today for what I believe to be an
illuminating and lively discussion and examination of recent devel-
opments in the telecommunications industry. Telecommunications
are a very basic, vital element of our daily lives, and at the same
time represent one of the most dynamic and exciting arenas of
American business today.

From its very earliest days, telecommunications technology has
literally revolutionized the way we lead our lives and conduct our
business. Imagine how different our lives would be were we unable
to telephone our families or fax documents to business associates.

At the same time, we are today on the threshold, if not in the
midst of what can truly be considered a revolution in the tele-
communications industry. Moreover, this pace of technological
change is matched by a breathtaking transformation in the com-
petitive landscape of the telecommunications industry. In the wake
of the Telecommunications Act of 1996, which promises to unleash
previously constrained competitive forces in the telecommuni-
cations industry, we read every day of new entrants into the tele-
communications field, new joint ventures, mergers, and other busi-
ness combinations which are working to reshape the whole tele-
communications industry.

Perhaps the most noteworthy of the developments since the pas-
sage of the Telecommunications Act is the emergence of mergers
between Bell Atlantic and NYNEX, SBC and Pacific Telesis, and
WorldCom and MFS. All of these developments, of course, contrib-
ute to a radically changing, competitive environment, and I believe
it is important for this committee to exercise its antitrust oversight
function to keep abreast of the transformations taking place in the
telecommunications industry and to explore how the antitrust laws

(1)

should properly be applied in this emerging new telecommuni-
cations age.

Today's hearing is an important first step in exercising this over-
sight function. By examining these three mergers, with my primary
interest being their ramifications under antitrust law as well as
their implications for consumers and for competition generally, this
committee will gain a vivid snapshot of what is happening in the
telecommunications field and, I hope, obtain further insight on the
proper application of the antitrust laws in this context.

While, of course, these mergers should and will be reviewed by
the Department of Justice for a proper assessment under the anti-
trust laws, I should point out that mergers are not in and of them-
selves anticompetitive. In an era where we are seeing increasing
globalization of telecommunications services, and in particular the
emergence of large global compainies and alliances, mergers of do-
mestic telecommunications firms may well help American compa-
nies remain competitive in this international arena.

Moreover, mergers may contribute significant cost savings and
may play an important role in the trend toward combined services
or, "one-stop shopping," for telecommunications services. All indica-
tions are that we will see more and more major telecommuni-
cations providers offering a full spectrum of services, including not
just local and long distance, but video, cable, and information serv-
ice technologies as well.

Indeed, just today I read in the Wall Street Journal that AT&T,
which many might think of as just a long distance company, has
won what is reported to be the largest out-sourcing contract to
manage a corporation's information services. This trend toward
providing a broad range of telecommunications services under one
roof, of course, will greatly benefit consumers and will in many in-
stances depend on mergers or other business combinations. In de-
veloping world markets, where domestic firms must compete, big is
not necessarily bad when it comes to domestic mergers. Indeed, we
will hear testimony today which may prove that certain mergers
can, in fact, enhance competition.

I believe that our hearing today will shed light on these and
other issues, and I want to thank the distinguished panelists who
have taken time from their busy schedules to join us. We will intro-
duce our first panel of witnesses in just a minute, but let me just
turn to Senator Leahy for any remarks he has for the minority.

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR
FROM THE STATE OF VERMONT

Senator Leahy. Thank you, Mr. Chairman. One of the self-pro-
claimed achievements of the Congress was the new telecommuni-
cations law. It was voted for by an awful lot of people in both par-
ties and it was going to unleash the benefits of competition. I voted
against the bill. I didn't believe that it would come up with that
much competition.

I said the day it passed on the floor that "Mega-mergers between
telecommunications giants, such as the rumored merger between
NYNEX and Bell Atlantic or the gigantic network mergers now un-
derway, raise obvious concerns about concentrating control in a few
gigantic companies of both the content and means of distributing

the information and entertainment American consumers receive.
Competition, not concentration, is the surest way to assure lower
prices and greater choices for consumers. Rigorous oversight and
enforcement by our antitrust agencies is more important than ever
to ensure that such mega-mergers do not harm consumers." I said
that then.

Now, so far — and I reahze that the law is somewhat new, but the
new telecommunications law has produced little competition in
local phone service or between players that have traditionally acted
in different segments of the industry. Outside of the Bell companies
and GTE, independent phone companies still account for, I believe,
less than 1 percent of the total market for local phone service.
Competition from the cable companies for telephone service has not
arisen, although that is not surprising. It has been my experience
cable companies much prefer monopolies because it is easier to
gouge the consumers than competition.

The new technologies have yet to provide an effective competitive
check on prices or to pressure improved services. Instead of this
kind of competition, we have seen in the months since the law
passed massive consolidation within the telecommunications indus-
try. Within only 2 months of the bill's passage, four of among the
biggest companies in this industry announced that they would not
compete; instead, they would merge. Instead of seeing new entrants
into every market, we are seeing old monopolies getting bigger and
expanding their reach.

As we are going to confirm today, concentration of ownership in
the telecommunications industry is currently proceeding faster
than the pace of competition. So my questions will be focused on
trying to understand how these mergers are good for competition
and for consumers. Perhaps they are. So far, those answers have
escaped me, but I assume that somebody will enlighten me.

When I wrote Chairman Thurmond back in April urging that we
convene an antitrust hearing into mergers in telecommunications,
that was my concern. I wanted to know why the companies in-
volved feel that bigger is better. I wanted to know why the compa-
nies involved chose to merge rather than to compete.

The determination whether these mergers will go forward, and
on what conditions, is a matter before the Department of Justice,
which has the expertise to scrutinize this. One of the provisions we
were able to preserve in the new Telecommunications Act was a
very strong savings clause that continues to require that tele-
communications mergers be reviewed in conjunction with our Fed-
eral antitrust laws.

The two mergers between the Bell companies will concentrate al-
most 45 percent of all local phone lines in the country in the hands
of just two companies. They will affect not only the millions of peo-
ple who depend on the companies involved for an increasing array
of advanced telecommunications services but also, of course, com-
petition in the entire industry.

I know that when I am at my farm in Middlesex, VT, or I am
at my office here in the District of Columbia, or whether I am at
the home I use during the session in Virginia, I still have only one
choice for dial tone and local telephone service. That choice — well,
actually, I have two choices. I have the choice of the Bell operating

company or no service at all. The current mantra of the industry
seems to be one-stop shopping, but if that one stop is at a monopoly
that is not competing on price and service, I don't think it is the
kind of one-stop shopping that consumers want.

I am concerned that the distraction of these huge mergers will
complicate and delay the companies' compliance with their new ob-
ligations to open up their networks. That would not be good for
competition in the local loop. I know that the Bell companies, the
FCC, and the State regulatory agencies are in an area of transition
and there is a lot of work to be done. But I am concerned that con-
solidation, Mr. Chairman, is taking precedence over competition
and may create additional barriers to effective competition.

We have three different mergers before us today. About the only
thing they have in common, of course, is the number of zeroes in
the value of the deals. They are all huge, they are all in the bil-
lions. What happens to NYNEX is very important to Vermont. It
is one of the major employers in my State and provides most of the
phone service to our State. I want to know where Vermont is going
to fit in the priorities of a much bigger company. What does that
mean for jobs, services, and telephone rates for Vermonters?

But I also, Mr. Chairman — and this has to be a concern of yours
and of Chairman Thurmond's — what do these things mean for
rural areas? You have large rural areas in your States, as I do in
mine. I know we are going to hear testimony that these mergers
will generate operational efficiency and cost savings. That is a good
thing, but local phone service is not competitive yet. We want to
make sure the savings are passed on to ratepayers. Ratepayers are
also important, not just the corporate officers and shareholders.

Mr. Chairman, I am glad we are having this hearing. As I said,
I may have overlooked as we went along some of the benefits of
such mergers, but I am sure if they are present, they will come out
at these hearings.

Thank you.

The Chairman. Thank you. Senator Leahy. Because of a wide va-
riety of conflicts, I can't be here throughout the whole hearing and
will only be here for a short period, but our chairman of the Anti-
trust Subcommittee is Senator Thurmond and he will chair the
hearing as soon as I leave. We are going to hear from him at this
time, since he has such a vital role in this matter.

Senator Thurmond.

STATEMENT OF HON. STROM THURMOND, A U.S. SENATOR
FROM THE STATE OF SOUTH CAROLINA

Senator Thurmond. Thank you, Mr. Chairman, I want to thank
you for proceeding with this hearing, despite obstacles and un-
avoidable delays. As chairman of the Antitrust Subcommittee, I am
pleased that you view this hearing as significant enough to merit
the attention of the full committee.

Fostering vigorous competition in the telecommunications indus-
try through application of antitrust principles remains an impor-
tant issue facing our Nation and deserves our attention. This is a
time of rapid change, and even large telecommunications compa-
nies worry about their continued health and survival.

The purpose of this hearing is to examine how competition is de-
veloping in telephone services following enactment of the Tele-
communications Act by considering the three large pending merg-
ers involving telephone services. Two of the mergers involve so-
called Baby Bells. Last April, SBC Communications and Pacific
Telesis stated their intent to merge. A similar announcement of
Bell Atlantic and NYNEX quickly followed. These firms are four of
the seven regional Bell operating companies created by the break-
up of the Bell System in 1984 to provide local phone service in sep-
arate regions of the country.

Each of these four Bell companies already enjoys a dominant
market position in local exchange services in its region, so the
mergers will not increase their market shares, but simply result in
much larger companies. Of course, the mergers will eliminate any
chance of the merging pair competing with each other in the fu-
ture, and some assert that these consolidations may make it more
difficult for others to offer competing local phone services.

The third merger represented here today is between WorldCom,
the fourth largest long distance company, and MFS, which provides
local access service to business customers in many cities. This
merger, announced just 2 weeks ago, has generated interest be-
cause of the potential of the combined company to provide end-to-
end service to customers. The ability to offer a full range of tele-
phone services from one source has been the driving strategy of
many large telephone companies in recent years.

These mergers are important because of the trend they may set
or the pressure they may place on other companies to consolidate
and become larger in order to be competitive. The role of the Con-
gress is to oversee implementation of the Telecommunications Act
to ensure that vigorous competition develops in areas where it has
been unable to flourish in the past, particularly in local telephone
service. However, it should be emphasized

The Chairman. We have a vote on. I am sorry to interrupt Sen-
ator Thurmond, but I will go vote and Senator Thurmond will fin-
ish his statement. As soon as he is finished, we will recess until
we can get back.

Senator Thurmond [presiding]. However, it should be empha-
sized that we are not here to determine the lawfulness of these
pending mergers under the antitrust laws. That task is entrusted
to the Antitrust Division of the Department of Justice. Under the
applicable antitrust standard in Section 7 of the Clayton Act, the
mergers can be modified or blocked only if their effect may be,
"substantially to lessen competition." Open investigations into the
Bell mergers prevent the Justice Department from sending a wit-
ness to testify today. However, Deputy Assistant Attorney General
David Turetsky has submitted a short written statement for inclu-
sion in the record.

Also I would like to enter into the record the statement of Sen-
ator Simon.

[The prepared statements of Senator Simon and Mr. Turetsky
follow:]

Prepared Statement of Senator Paul Simon, a U.S. Senator From the State

OF Illinois

When the telecommunications legislation became law earlier this year, its promise
was to provide consumers with more choices, better service and lower prices. I voted
against the legislation at the time because I didn't feel that it would achieve these
important goals. I still don't.

I commend the Chairman for holding hearings on mergers in the telephone-based
telecommunications sector, but we should also examine the effects of the 1996 Act
in another segment of the industry: radio broadcasting.

One of the many problems with the new law is its complete elimination of na-
tional radio ownership limits and tremendous relaxation of local radio station own-
ership limits. Its provisions run contrary to the intent of the Communications Law
of 1934, which was based, in part, on the fundamental principle that the pubUc
owns the airwaves. The 1934 Act allows the FCC to grant broadcast station Ucenses
only if it finds that doing so will further the "public interest, convenience and neces-
sity." While this principle and this requirement do not mean that radio broadcasting
cannot be run as a for-profit business, they do mean that these licenses are not a
right, but a privilege. One of the duties that should continue to accompany that
privilege is to serve the public interest of the community. The 1996 Act cuts radio
programming loose from the moorings of the public interest and potentially sets it
adrift in a sea of nationally homogenized programming that serves only the interest
of big corporate radio owners in search of advertising dollars.

In less than two weeks after enactment of the 1996 Act, almost $1.4 billion in
radio properties changed hands. By July there had been $5.2 billion in radio deals.
In the July 8, 1996 Investment Dealers Digest, Joseph Zimmel of Goldman, Sachs
& Company said of the deals, "[t]hey want more outlets in the same market so they
have a more powerful story to offer advertisers." A more powerful story to offer ad-
vertisers? That says it all.

Group station owners argued that the prior to the 1996 Act, ownership caps sti-
fled radio's ability to grow and its ability to draw a profitable share of advertising
revenues. But the likely effect of the relaxation of the limits is echoed in the words
of an American Radio Systems Company executive David Pearlman who said in the
February 5, 1996 Broadcasting & Cable magazine, all companies wiU have to make
the decision whether to get big or get out."

Two of the companies moving to get even bigger are Westinghouse and Infinity,
which with their proposed merger, would own 83 radio stations — 69 of which are
in the top markets — with combined revenue of $1 bilUon dollars and eight percent
of the radio industry's total advertising revenue. This deal would not have been pos-
sible without the station ownership changes made in the Act.

In the first edition of Ben Bagdikian's "Media Monopoly" (1983), he documented
the rapid increase in concentration of media ownership by national and multi-
national corporations that "control what America sees, hears and reads." At that
time, 50 corporations earned more than half of all revenues derived from the dis-
semination of information. In the most recent edition of Mr. Bagdikian's book
(1992), he found there were just 20 firms that earned more than half of such reve-
nues.

This increased concentration raised the obvious concern about diversity in broad-
casting, a hallmark of the radio industry. As the companies "get big" programming
tends to get more generic. As stated by Robert Unmacht, the editor of the radio in-
dustry newsletter, the M Street Journal, "I feel sorry for the listeners * * * finding
a creative and interesting radio station will be harder because the pressure is on
to make them very much alike." For instance, since 1994, five of New York's FM
stations switched their format to modem rock. An Infinity-owned station, WXRK,
was a classic rock station until earlier this year when it too switched to a modem
rock format.

When a company owns many stations in one market, it can offer package adver-
tising deals to that smaller owners can't offer. They can also cross-promote their sta-
tions. The end result is that they will have the power to force smaller owners out
of business. That will leave listeners with fewer voices, less diversity and, probably,
less localism.

Last month, the Justice Department approved the $774 million merger of radio
group owners Jacor and Citicasters Inc. This merger, along with other pending
mergers involving Jacor, would give it 51 stations in 15 major markets. The Depart-
ment ruled, however, that Jacor could not maintain the 53% share of advertising
dollars it would have acquired in Cincinnati and ordered them to divest down to
a 50% share. The Department believed that without the divestiture, Jacor would

have eliminated all of the competition between the stations and advertisers would
have been forced to pay higher rates.

It is my hope thai as the Justice Department continues its review of these radio
mergers for their anti-competitive effect, that, to the extent appropriate, it will also
consider the direct effect on the listening audiences.

I am a cosponsor of legislation to restore the radio ownership caps in place prior
to passage of the Act. The biU is now pending in the Commerce Committee. Through
I am realistic about the odds of this legislation moving this year, I am hopeful that
there will be a legislative fix at some point in the near future. While restoring own-
ership caps to their previous limits will correct only one of the bill's many flaws,
it is certainly a step in the right direction.

Prepared Statement of David Turetsky, Deputy Assistant Attorney General,
U.S. Department of Justice

The Department of Justice appreciates the opportunity to share its perspective on
the outlook for competition in the telecommunications industry, and the Depart-
ment's crucial role in preserving competition in the telecommunications industry, in
the wake of enactment of the Telecommunications Reform Act of 1996.

Competition is clearly the first guiding principle and the immediate objective of
the new law. By removing a number of legal and regulatory obstacles to competi-
tion, the new law makes more competition possible. We need to ensure that such
potential is realized by ensuring that anticompetitive conduct and combinations do
not set up new roadblocks. The changes in the law, the regulatory framework and
the other changes in the industry, particularly changes in technology, make anti-
trust enforcement not only more challenging, but also even more important.

The mission of the Antitrust Division and the antitrust laws in the new and
changing world of telecommunications is the same as our mission has always been —
protecting and promoting competition. Keeping markets free and open has always
been the mission of the Antitrust Division, and it is a mission which has always
enjoyed strong bipartisan support. The Antitrust Division has a tremendous record
of achievement in the telecommunications area, including fostering competition
through the break-up of AT&T in 1984. Since that action, prices to consumers for
long-distance, manufacturing, and information services have dramatically declined
and innovation has been spurred. This more competitive environment has positioned
our nation's telecommunications sector to successfully compete throughout the
world.

I will give particular emphasis in this statement to our merger enforcement work,
as an unprecedented wave of telecommunications mergers has been occurring since
the passage of the Act and is expected to continue. Of course, we will also be enforc-
ing the Sherman Act against restraints of trade or illegal monopolization of any
telecommunications market, as well as consulting with the FCC regarding applica-
tions by the Bell companies to enter the long distance business, in accordance with
section 271 of the new law. But merger enforcement promises to be a major focus
of our telecommunications work in the foreseeable future. We will need to devote
a significant portion of our resources to this task.

merger enforcement

The Antitrust Division reviews proposed mergers under section 7 of the Clayton
Act for their possible anticompetitive effects. The new Telecommunications Act not
only preserved this important role, but also expanded it by eliminating section
221(a) of the Communications Act of 1934 which immunized mergers between tele-
phone companies from antitrust review if approved by the FCC. We are grateful to
the members of this Committee who recognized that section 221(a) was not in keep-
ing with the competitive market basis of the Telecommunications Reform Act and
successfully worked to remove it.

The new law has spawned an unprecedented wave of telecommunications industry
mergers, acquisitions, and joint ventures, including among some of the largest and
most prominent firms in the industry. Not only has the total volume of our workload
substantially increased, but, because of the new possibilities presented by the new
law, the telecommunications-related mergers that are occurring are different and
more complex than previous mergers in this industry. As a result, we need to devote
virtually unprecedented resources to reviewing the competitive aspects of these cor-
porate unions. Nevertheless, with continued congressional support, I am confident
we will continue to be able to fully protect competition and consumers from anti-
competitive results.

Many of the mergers are said to be taking place in preparation for changes in the
marketplace expected to result from enactment of the new law. Others are mergers

that were legally precluded before enactment — such as by regulatory limitations on
the number of radio stations a single firm can own.

Of course, I am not at liberty to comment specifically on any of the proposed
mergers that may be currently under review by the Antitrust Division. But citing
a few indicia of this merger wave that have been reported publicly in the press dur-
ing the past couple of months helps show its significance.

According to press reports, the three announced proposed mergers involving Bell
operating companies alone have a combined estimated value of $48 billion. There
are also mergers between non-Bell Operating Companies that provide telephone
service that have been proposed. The potential competitive consequences from all of
these mergers must be fully assessed, and we are in the middle of these reviews
right now.

The changes discussed above have also spurred numerous TV and radio station
acquisitions. According to press reports, thus far this year alone, TV station acquisi-
tions have totaled an estimated $7 billion in value. Radio station acquisition deals
announced this year, 189 in number, have totaled an estimated $25.6 billion in
value. We have already filed one case, Jacor Communications, in which we alleged
that a radio station acquisition violated section 7 of the Clayton Act, and ciurently
we are reviewing several other proposed acquisitions raising competitive issues.

And this is only the beginning. The new law is barely seven months old. The regu-
lations to implement it are just beginning to be finalized.

All this is taking place against the backdrop of record merger activity throughout
our economy. According to recent press reports, last year set a merger record at
$502 billion total value. And as of a month ago, this year's rate was out-pacing last
year's rate by almost 15 percent.

We intend to be vigilant in performing our merger enforcement responsibilities,
and we appreciate the continued support of Congress. The Antitrust Division will
be closely monitoring transactions in the telecommunications industry — as we must.
Developments in the communication of information will not only have a profound
and immediate impact on virtually all consumers, but will likely be the catalyst for
innovation and productivity growth in the economy well into the next century.

Sound and reasoned merger enforcement is needed to ensure that competition
continues and grows as telecommunications markets are restructured. Competitive
markets are crucial for maximizing the development of innovative technologies and
services and for providing consumers with the widest possible range of choices at
the lowest possible prices. So it is crucial to prevent mergers that would dampen
the competitive impulse or that would limit market access by competitors. Con-
sequently, we will be subjecting proposed mergers in the telecommunications indus-
try to the full rigorous scrutiny required by law. And, if there is significant evidence
that a merger is likely to result in competitive harm, we will challenge it, and we
will structure our proposed remedy to prevent that harm.

CONCLUSION

The world of telecommunications is changing dramatically. Passage of the new
law ushers in a challenge to shift the fundamental paradigm from regulation to
competition as the core of our telecommunications policy. That is a shift that we in
the Antitrust Division welcome and will continue to support and encourage.

As the regulatory moorings that have held the structure of this industry in place
for the better part of a century are being cut, there will be many new business op-
portunities, and ultimately new products, services, and combinations that perhaps
even the most visionary among us may not yet foresee. The job of antitrust enforces
in the face of such dramatic change is to safeguard the competitive marketplace that
will enable these positive developments to unfold. That will make the new law's
promise a reality, and maximize the resulting benefits for consumers and our econ-
omy.

Senator Thurmond. It is instructive to note that the purpose of
our antitrust laws is not to favor one group over another, but to
utihze objective principles to encourage competition for the benefit
of consumers. Proper application of antitrust principles ensures
that competition flourishes and that Americans enjoy the highest
quality goods and services at the best possible prices. If antitrust
principles are neglected, however, competition is likely to suffer
and we risk avoidable concentration of market power, leading to in-

flated prices, less innovation, and erosion of our Nation's competi-
tive standing.

Our antitrust laws shield American markets from economic dis-
tortions by fostering healthy competition, so that companies rise or
fall on their merits rather than through abuse of market power and
other anticompetitive practices. In short, antitrust law is both
proconsumer and probusiness.

The Telecommunications Act of 1996, which we passed in Feb-
ruary, is one of the few pieces of legislation that can truly be de-
scribed as "landmark." Under the vigorous leadership of Senator
Pressler, chairman of the Commerce Committee, our Nation's basic
communications law was overhauled for the first time in 60 years,
while ensuring that mergers like those being discussed today re-
main fully subject to our antitrust laws.

Senator Pressler has correctly stated that the intent of the act
is to achieve lower prices and better services through more com-
petition, less Government regulation, and the broader operation of
market forces. The fundamental reason for this hearing, and the
challenge before us, is to ensure that the promise of the Tele-
communications Act is realized for the benefit of consumers. In this
regard, when the Bell mergers were announced I personally called
in the CEO's to express concern that local rates for consumers
should not increase.

The ultimate impact of the Telecommunications Act depends on
its implementation in the marketplace. While the act and its regu-
lations are intended to produce vigorous and sustained competition
for the benefit of American consumers, achievement of this goal can
only be measured in the real world. As the marketplace responds
to the act and other developments, significant changes in the shape
and composition of the telecommunications industry are inevitable.

In addition to the three mergers we are examining today in the
area of telephone services, many other large telecommunications
mergers are occurring in cable, radio, and other areas. This trend
of mergers, joint ventures, and other business alliances is certain
to continue in the future. At the same time, the telecommuni-
cations industry is swelling with large numbers of new entrants.
While it is impossible to predict the future, I look forward to hear-
ing the views and best estimates of our witnesses today about the
development of the telecommunications world over the next few
years.

As our Nation is a free-market economy, the Government should
not block or resist the reorganization of firms seeking better ways
to provide services to consumers unless such moves are anti-
competitive. In many cases, mergers will be procompetitive, result-
ing in efficiencies and better services at lower prices for consumers,
and the application of antitrust principles by the antitrust enforce-
ment agencies should so reveal.

Although mergers between dominant parties routinely receive
tough antitrust scrutiny, mergers between smaller players are not
likely to face problems under the antitrust laws. For example, the
proposed merger between WorldCom and MFS appears likely to
create a more effective but nondominant competitor which, to my
knowledge, has not raised any antitrust concerns.

Less than a year-and-a-half ago, I chaired a hearing on antitrust
issues in the pending telecommunications bill. Remarkable
progress has been made since that time, but we must not sit back
and view our work as complete. This is a vital period which will
determine whether widespread competition can be achieved in local
telephone services. Until healthy competition arrives in all tele-
communications markets, consumers will not reap the full benefits
of the Telecommunications Act.

I want to thank each of the witnesses for their time and effort
in appearing before the committee this afternoon, and expect that
they will be very informative.

Now, we will stand in recess until the chairman returns. At that
time when we take up the witnesses we will allow 5 minutes for
each witness. They can put their entire statements in the record,
but we have so many witnesses, we have to limit them to 5 min-
utes.

[Recess.]

The Chairman. Our first panel of witnesses today are executives
from telecommunications firms who have announced mergers.
First, we will hear from Mr. James Young, who has been vice presi-
dent and general counsel for Bell Atlantic Corp. since 1992. After
Mr. Young, the committee will hear from Mr. James Ellis, who has
been the senior executive vice president and general counsel for
SBC Communications since 1989, and Mr. Bernard J. Ebbers,
president of LDDS WorldCom, will finish the first panel. Mr.
Ebbers has been president of LDDS WorldCom since 1985.

Now, let me just announce that the second panel consists of
three more industry executives. Mr. Michael Salsbury is executive
vice president and general counsel for MCI Communications. Wil-
liam Barr is before us today as senior vice president and general
counsel for GTE Corp. Mr. Barr, of course, is a former attorney
general and is a familiar face to many around here, so we welcome
you back to the committee, General Barr. Mr. Robert Atkinson,
senior vice president for legal, regulatory and external affairs for
Teleport Communications Group in Staten Island, NY, will finish
up that distinguished panel.

Then in our final panel today, we will hear from four distin-
guished telecommunications experts. First up will be Mr. Peter
Huber, a senior fellow from the Manhattan Institute. He is an ex-
pert in telecommunications markets and antitrust policy. Mr. Rob-
ert Crandall is a senior fellow at the Brookings Institution here in
Washington, DC. He brings us expertise in telecommunications
regulation.

Mr. Ronald Binz is president and policy director of the Competi-
tion Policy Institute. He is an expert on competition policy and
consumer issues in the telecommunications industry. Mr. Dale Hat-
field is the chief executive officer of Hatfield Associates and he will
be the final witness today. Mr. Hatfield also brings us expertise in
telecommunications policy.

So I would like to thank all of these distinguished witnesses for
taking time to be with us today. Because we have so many wit-
nesses testifying, I would ask that each of you — Senator Thurmond
undoubtedly already has — limit your testimony to 5 minutes per
witness. We will put all statements in the record as though they

were fully delivered, and if you can summarize in 5 minutes, we
would appreciate it. The red light means you should quit as soon
as that comes on.

So we will turn first, then, to Mr. Young.

PANEL CONSISTING OF JAMES R. YOUNG, VICE PRESIDENT
AND GENERAL COUNSEL, BELL ATLANTIC CORP., ARLING-
TON, VA; JAMES D. ELLIS, SENIOR EXECUTIVE VICE PRESI-
DENT AND GENERAL COUNSEL, SBC COMMUNICATIONS,
INC., SAN ANTONIO, TX; AND BERNARD J. EBBERS, PRESI-
DENT AND CHIEF EXECUTIVE OFFICER, LDDS WORLDCOM,
JACKSON, MS

STATEMENT OF JAMES R. YOUNG

Mr. Young. Ck)od morning, Mr. Chairman. My name is James
Young and I am general counsel of Bell Atlantic. I would like to
thank you and the committee for the opportunity to appear before
you this afternoon because I would like to take Senator Leahy up
on his offer. I want to have the chance to explain to you why our
merger is procompetitive, why it is good for consumers, why it is
good for employees.

I would like to touch first, if I could, in my remarks, here on the
fact that the new Bell Atlantic will be a good competitor. I want
to focus first on a point that Senator Leahy raised. As required by
the Telecommunications Act of 1996, we will continue to open our
network to facilitate competition in the local services businesses.

It may not be evident to members of the committee, but a lot of
the hard work of implementing the Telecommunications Act is
going forward. We have negotiated a number of interconnection
agreements. We are providing unbundled network elements, as the
act requires. A lot has gone on. It may not be visible, but the act
is working.

In addition, though, and maybe even more important, we intend
to fulfill the promise of the act by bringing competition to the do-
mestic long distance market, a market that has been dominated by
a cartel for the last several years. We expect that the combined
Bell Atlantic-NYNEX will be a better competitor than either of the
individual companies would have been alone.

We also will be a strong competitor for cable. Consumers want
choice in cable and we are determined to provide that choice, and
as well in the emerging market for Internet and Internet access
services. In these areas, consumers will see more choices, better
prices. We are also committed to good service. With competition
coming to our business the way the Telecom Act of 1996 dictates,
we don't have any other choice.

One brief note on the reasons behind the merger. I don't think
it comes as any secret to the members of this committee that today
the telecommunications marketplace is dominated by very large
companies. Individual companies such as AT&T, Nippon Telephone
and Telegraph, Deutsche Telekom are all larger than our new
merged company will be. In fact, even after its divestiture, AT&T
will be twice the size of the merged Bell Atlantic-NYNEX.

Now, these giant companies are, over and above their initial size,
forming into even larger alliances to compete in the telecommuni-

cations marketplace. There is the AT&T-led World Partners. There
is MCI's lash-up with British Telecom. There is the Global One or-
ganization that consists of Sprint, France Telecom, and Deutsche
Telekom. These aren't ephemeral alliances; they are very perma-
nent arrangements. British Telecom has poured billions into MCI.
The European partners have poured billions into Sprint. These are
very permanent arrangements.

These companies are very logical challengers for the new Bell At-
lantic and we are a very logical company to provide more competi-
tion to them. Indeed, AT&T has recently announced that, with the
Telecom Act of 1996, they believe they will have 35 percent of the
local exchange market in this country in a matter of only a few
years.

Mr. Chairman, as you pointed out, this committee is concerned
with antitrust issues. In my testimony, I have attempted to deal
with what I think is one of the principal antitrust issues raised
about the merger, and that is. Would Bell Atlantic and NYNEX
have competed with each other if not for the merger? I have at-
tempted to deal with this in detail in my written testimony. Let me
just make a couple of points.

First, as Senator Thurmond noted, we are today — we do not com-
pete with NYNEX. We are not in the same markets and we have
no plans to compete with each other. So there is absolutely no over-
lap between the two companies.

Second, as I noted, the Telecommunications Act is working.
There is a large number of companies that are eager to get into my
local exchange markets and that are eager to get into NYNEX'
local exchange markets. Even in Vermont, for example, Hyperion
has negotiated an interconnection agreement to provide local ex-
change service. So there is plenty of competition.

If I could summarize my views on this merger in just one
thought, it would be this. A year ago. Bell Atlantic and NYNEX put
together their cellular companies to provide better service to cus-
tomers. Now, a year later, by merging those two companies, we are
providing better service at better rates, and in terms of jobs the
new combined company has more jobs than either of the two com-
panies did before. By putting together Bell Atlantic and NYNEX,
the telephone companies, we are going to do the same thing.

Thank you, Mr. Chairman.

The Chairman. Is that more jobs in both of the two companies
than before? Is that what you meant to say?

Mr. Young. Yes.

[The prepared statement of Mr. Young follows:]

Prepared Statement of James R. Young

Good morning, Mr. Chairman and members of the Committee. My name is James
Young, and I am General Counsel of Bell Atlantic Corporation. After the merger,
I will be General Counsel of the new Bell Atlantic.

I want to thank you for the opportunity to appear before this Committee today
to discuss this merger. In my testimony, I would like to show you that consumers
stand to benefit from the greater competition and innovation that the merged com-
pany will be able to bring to the telecommunications marketplace, both in this coun-
try and worldwide.

This merger is the result of the astounding changes that have occurred in the
telecommunications industry in recent years. The Information Age is here, brought

to us by the technological advances we read about every day, either in old-fashioned
newspapers or in e-zines on the Net.

Technology has changed the legal and regulatory paradigms in this industry.
There are no more exclusive franchises, for cable or telephone companies. No one
is guaranteed a "fair rate of return." Markets are truly global, not local. These
changes offer us opportunities to expand beyond our traditional businesses. At the
same time, they offer others, often firms or alliances with resources greater than
ours, the chance to go after the business that we have long counted on.

The territories served by Bell Atlantic and NYNEX are among the most attractive
for these competitors to attack. And this competition is well underway from some
of the worlds' largest companies, including AT&T, SBC, Time Warner and the com-
bination of British Telecom and MCI. AT&T alone has said that it will take one-
third of the local service business. We need to match their resources and their skill
if we are to succeed.

REGULATORY STATUS AND HISTORY

Before I tiu*n to the benefits of the merger, let me tell you where we are in going
through all the regulatory approvals that we need in order to consummate this
merger. We made our Hart-Scott-Rodino filing on May 1, received a second request
from the Department of Justice on May 31 and substantially complied with that re-
quest in July.

On July 3, we filed with the Federal Communications Commission applications to
transfer various FCC licenses. The Commission has issued a public notice asking
for comment on the applications later this month with rephes due in late October.

At that same time, we filed papers with the state utility commissions in all 14
jurisdictions in which Bell Atlantic and NYNEX provide local service, advising them
of our plans or, where required by State law, seeking their approval of the trans-
action. Three State commissions have already indicated that they have no need to
look any further at the merger.

At this point, neither a State or federal regulatory agency, State antitrust or
consumer protection authority, nor the Department of Justice has indicated that it
will oppose or otherwise attempt to block the Bell Atlantic-NYNEX merger.

That is where we are today in the approval process. Now let me take us back a
few years to the breakup of the Bell System in 1984, the court-approved divestitiu-e
that gave birth to both Bell Atlantic and NYNEX. At that time, there was nothing
magical about there being seven Baby Bells. The MFJ neither required nor prohib-
ited the consolidation of the ownership of the Bell companies into any particular
number of entities. AT&T proposed to distribute its 20-plus local telephone compa-
nies among seven holding companies largely for administrative convenience. The
Department of Justice agreed, and the court approved their plan.

This decision was not guided by antitrust concerns. In early 1982, before the deci-
sions was made, the head of the Antitrust Division, Professor Baxter, told the Sen-
ate Commerce Committee that there might be any number of local Bell companies
and that he "would not be greatly alarmed by a single operating company." If a sin-
gle nationwide operating company posed no antitrust risk then, the combination of
two of the seven holding companies surely can pose no risk now that all tele-
communications markets are far more competitive.

THE MERGER WILL BENEFIT THE PUBLIC

But that's enough of the past. Let's look at what will happen in the future. The
new Bell Atlantic will be a strong company, well positioned to compete with the tele-
communications giants of the world. Individual companies such as AT&T, Nippon
Telephone and Telegraph and Deutsche Telekom are all larger than the merger
company will be. Even after AT&T's divestiture, it will be twice as large as the new
Bell Atlantic. These international giants are also teaming up into global alliances
like the AT&T-lead World Partners, MCI's and British Telecom's Concert, and Glob-
al One of Sprint, France Telecom and Deutsche Telekom. These arrangements are
not merely ephemeral alliances that will come and go. British Telecom has invested
$4.3 billion in MCI in return for a 20 percent stake in the company, an ownership
interest comparable to what France Telecom and Deutsche Telekom received in ex-
change for their $3.7 billion investment in Sprint.

The location of the new Bell Atlantic, serving both the political and financial cap-
itals of the United States, makes the company a natural target of — and challenger
to — these multinational powerhouses. Bell Atlantic and NYNEX customers make
about 35 percent of the international calls from the United States, and we want to
be able to begin to provide competition for these customers' business.

The new Bell Atlantic will be a good competitor at home. First, we will complete
the opening up of our network to facilitate local service competition, as required by
the Telecommunications Act of 1996. Although we may disagree with many aspects
of the FCC's order implementing those provisions of the Act, we are moving ahead
to comply with it. And at least as important, we intend to fulfill the promise of the
Act by bringing competition to the domestic long distance market that has been
dominated by AT&T, MCI and Sprint. We expect that the combined Bell Atlantic/
NYNEX will be a better competitor than either company could have been on its own.

We also will be a strong competitor against the incumbent cable companies and
in the emerging marketplace for Internet and Internet access services.

In all these areas, competition will bring consumers more options than they have
today and hold down the lower prices they have to pay.

THE MERGER WILL NOT IMPEDE COMPETITION OR HARM THE PUBLIC

This merger will clearly not recreate the old Ma Bell, as some critics have sug-
gested. While we will be a large company, we will not even be the largest tele-
communications provider in the United States. We plainly will not remotely ap-
proach being the monolith that was the old AT&T, which dominated every facet of
telecommunications, from equipment manufacturing to local service and long dis-
tance. We will be a new entrant, with virtually a zero market share of the
interLATA long distance business. In our local markets, the merged company will
begin its Ufe as the largest provider, but the reforms required by the Telecommuni-
cations Act and State commission orders will cause us to face competition that the
old Ma Bell never dreamed of And because our competitors in this marketplace will
be large, well financed companies such as AT&T and MCI, we will have a real fight
on our hands — a fight which, I must add, consumers can only benefit from.

Nor will this merger eliminate or substantially reduce competition in any line of
commerce. The combination of the two companies will still leave ample numbers of
providers in every segment of the telecommunications marketplace.

For example, some argue that Bell Atlantic and NYNEX could have competed in
each other's territories in offering local exchange services. There are already numer-
ous firms competing or ready to compete for consumers' business — more than twenty
competitive local exchange and access service providers in New York, and only a few
less in New Jersey. Consumers in these states will have a wide range of good
choices even without the separate participation of both Bell Atlantic and NYNEX.

While Bell Atlantic could have competed in New York State, we have no special
advantage that would have caused us to enter the New York market in the absence
of the merger. In this connection, it is important to remember that Bell Atlantic has
been free to go into New York for the last ten years, and it has chosen not to do
so.

Bell Atlantic would have no special advantage as a competitor in New York. Bell
Atlantic has no facilities in New York and it could not readily use its facilities in
New Jersey to compete on the other side of the Hudson River. In contrast, many
other companies — including AT&T, MCI, Sprint, Time Warner, Teleport, and MFS-—
already have switches and transport facilities in place.

Bell Atlantic is contiguous with NYNEX only in the New York City area, as most
of the area along the border between New York and Pennsylvania and New Jersey
is served by unaffiliated telephone companies. The New York City area is already
one of the most intensely competitive telecommunications markets in the country.

Unlike many other telecommunications service providers, Bell Atlantic has no cus-
tomer base in New York, no network of sales offices or customer service centers.
Other firms, especially those who have long engaged in national marketing efforts,
have greater name recognition in New York than does Bell Atlantic, in spite of the
geographic proximity.

1 am not the only one who thinks that Bell Atlantic should not be considered a
potential competitor in the local exchange business in New York — the FCC has
reached the same conclusion. When the Commission recently waived certain pricing
rules applicable to NYNEX because of the "increasingly competitive" character of
the market in the New York City area, its discussion of current and expected com-
petition did not even mention Bell Atlantic'

This view of the marketplace is consistent with that held by others in Govern-
ment. In discussion after discussion, including testimony before Congress, the Ad-
ministration cited long distance carriers, cable operators, competitive access provid-
ers and wireless providers as the source of competition for the Bell companies.

'NYNEX Telephone Cos., 10 FCC Red 7445 (1995).

These analyses do not even mention other Bells as providing competition outside
their existing territories.^'

Nor will the merger impede in any way the ability of new entrants to come into
our local markets. The framers of the Telecommunications Act did their job well in
writing requirements for the opening up of local markets to competition. And by
making this opening up a prerequisite for our getting interLATA authority from the
FCC, they gave us every incentive to get on with the job and to get it done.

Some skeptics have suggested that the merger will cause our customer service to
deteriorate. This is not so. We remain committed to providing all our customers the
highest quality service possible. The new Bell Atlantic will draw on the best ideas
of each company to improve overall service and customer satisfaction. If we are to
succeed in the marketplace of tomorrow, we must provide good customer service.

This merger is not only good for consumers, it will also benefit our employees. The
merger will not cause a single bargained-for employee to lose his or her job. Both
companies will, of course, honor existing labor contracts. While we do expect to be
able to consolidate a number of administrative and corporate functions, the Tele-
communications Act opens up new opportunities for us and our employees to move
into new areas. The senior management team is committed to acting responsibly to
all our employees and will pursue redeployment of people whose jobs are affected
by the merger.

Thank you.

The Chairman. Mr. Ellis.

STATEMENT OF JAMES D. ELLIS

Mr. Ellis. Mr. Chairman, I am Jim Ellis, representing South-
western Bell, SBC Communications. I am delighted to be here to
talk about our merger with Pacific Telesis, and also to comment
briefly on the state of telecommunications competition.

With respect to the merger, I would say first of all that we be-
lieve very strongly that the combined company will be good for con-
sumers, for our employees and for our shareholders. With r'^spect
to this combined company, it is going to be one that is going to be
stronger financially. It is going to have better resources, it is going
to have efficiencies, it is going to have scale, and it is going to have
the management talent to compete against the very large competi-
tors that are out there, the large national and multinational com-
panies.

They are household names. Jim Young has just mentioned some
of them, but certainly they are much larger than SBC and in some
cases they are larger than the combined SBC and Pacific Telesis —
names like AT&T and MCI and British Telecom, Time Warner, and
I could go on. In addition to those, there are hundreds of other
competitors already indicating that they intend to compete in Cali-
fornia and in our five States where SBC operates today.

With respect to the antitrust issues, we feel very strongly that
this merger is not anticompetitive. It is procompetitive. To put it
in the Clayton Act terms that I believe Senator Thurmond talked
about before, there is nothing about this merger that will substan-
tially lessen competition. We are not competitors of Pacific Telesis
and they are not our competitors today. Beyond that, we are not
potential competitors of Pacific Telesis and they are not potential
competitors of ours.

It is clear under the law you look at the plans of both companies.
Our plans that preceded this merger by a long time show clearly

2 E.g., Memorandum of the United States in Support of MFJ Modification to Permit Limited
Trial of Interchange Service by Ameritech, United States v. Western Elec. Co. (D.D.C. 1995);
Comments of United States Department of Justice at 36, FCC CC Dkt. 96-98 (May 16, 1996);
Statement of Anne K. Bingaman Before the Senate Commerce Committee, March 3, 1995.

our intentions were not to compete with Pacific Telesis, and vice
versa. Given that, there is nothing about this merger that will
eliminate an actual competitor or a potential competitor. I would
say further, even if we were potential competitors, which again we
are not, there are substantially more competitors in this market
than the three that the Justice Department guidelines look to.

Now, with respect to the issue of telecommunications competi-
tion, in general, I will try and be brief and simply point out, as the
committee knows, that in January of 1996 the new Telecommuni-
cations Act was passed and the President signed it in February.
That act had as its centerpiece the deregulation of telecommuni-
cations and the opening of all markets to all competitors. It was
supposed to work on the basis of private negotiations under the
auspices of the States. Where necessary, there would be mediation
and, beyond mediation, arbitration, again under the auspices of the
States to introduce competition across the local exchange markets.

The FCC released an order last month and it was anything but
deregulatory. In fact, what the FCC has done is essentially pre-
empted the State regulation of local exchange competition, some-
thing that for generations has been the subject of State jurisdic-
tion. The FCC has come in and taken 8 or 9 pages of the statute
and written an almost 700-page decision, with 3,200 footnotes —
an3^hing but deregulatory. Along the way, they have preempted
the regulation authority of the States over local exchange. I am not
talking long-distance; local exchange telephone service.

They have preempted private negotiations, and they have also
set in place a pricing scheme that has the effect of subsidizing
many of the large companies that I have just ticked off here, and
at the same time confiscating the property of others. At a mini-
mum, this decision has cast a cloud over the implementation of the
Act. It has already prompted, not surprisingly, a lot of litigation.
We have seen four or five appeals filed already, and I think, at
best, it is going to create uncertainty. At worse, it is going to re-
quire expenditure of funds. Ultimately, we are going to have to
start over, when I believe the commission's decision is going to be
reversed.

Thank you, Mr. Chairman.

The Chairman. Thank you, Mr. Ellis. As I understand it, you are
saying that neither of the merging companies here were competi-
tors or were likely to become competitors.

Mr. Ellis. That is correct, sir.

[The prepared statement of Mr. Ellis follows:]

Prepared Statement of James D. Ellis

My name is James D. Ellis. I am the Senior Executive Vice President and General
Counsel of SBC Communications Inc. ("SBC"). At the outset, I want to thank Sen-
ator Hatch and the members of this committee for their interest in the state of com-
petition in the telecommunications industry, including the proposed merger of SBC
and Pacific Telesis Group ("PacTel").>

My testimony is divided into two parts. In the first part, I will focus on the
planned merger between SBC and PacTel. The merger raises no concerns under this
nation's antitrust laws, and is in the interest of the customers, employees, and
shareholders of both companies. The second part of my testimony will focus on the
state of competition in the telecommunications industry.

^Attachment 1 contains more information about SBC and PacTel.

I. THE SBC/PACTEL MERGER

A. Background information concerning the SBC / PacTel merger

On April 1, 1996, SBC and Pacific Telesis Group announced that the two had
agreed to merge into a single company to be known as SBC Communications Inc.
The combined company will ofTer telecommunications products and services under
the brand names of Southwestern Bell, Pacific Bell, Nevada Bell, and Cellular One.

The SBC/PacTel merger will combine two of the smallest regional Bell companies
into a single company. The merger is designed to draw upon the strengths of both
SBC and PacTel, in order to create a single company capable of more effectively
meeting the challenge of the new competitive telecommunications environment. SBC
has a proven track record in product development, in marketing and sales of tele-
communications products and services, in providing wireless services, in revenue
and net income growth, and in increasing shareholder value. PacTel is a leader in
network integration, in the development of Internet access services, and in expense
reduction and process management. The merged company will be better positioned
to compete with such telecommunications giants as AT&T (and its merger partner
McCaw), MCI (and its partner British Telecom), Sprint (and its partners France
Telecom and Deutsche Telekom), TCI, Time Warner, and many others.

The merged company will also be better positioned to deliver greater benefits to
customers, employees, and shareholders. Customers will benefit because the com-
bination of the resources and strengths of both companies, including a sharing of
start-up costs, will enable the merged company to offer a broader array of tele-
communications products and services at competitive prices. Employees will benefit
because the combined company will be a financially stronger and more effective
competitor, resulting in the creation of new jobs and advancement opportunities in
new lines of business. Shareholders will benefit because the combined company will
have a more diversified, stronger financial base and be better positioned to succeed
in growing the business and shareholder wealth.

The merger will require Department of Justice ("DOJ"), Federal Communications
Commission ("FCC"), California Public Utilities Commission ("CPUC") and Nevada
Public Service Commission ("Nevada PSC") review. The DOJ will review the merger
under Section 7 of the Clayton Act. The FCC will have to review and approve the
transfer of microwave, personal communications service ("PCS") and other licenses
from PacTel to SBC. And finally, the CPUC and the Nevada PSC will review and
approve the transfer of control in accordance with applicable state law.

B. The Hart-Scott-Rodino merger review process

On April 10, 1996, SBC and PacTel filed their pre-merger notification documents
with the DOJ pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of
1976 ("HSR"). Under the HSR procedures, the DOJ issued its "second request" for
documents and information concerning the merger. SBC and PacTel have both com-
pleted their production of these materials, and the DOJ has advised the parties that
they are in substantial compliance. This means that we are free to close the trans-
action as soon as other regulatory approvals are received. In the meantime, we are
providing answers to the DOJ's few remaining questions. We hope that the DOJ will
conclude its investigation in the very near future.

C. This merger presents no antitrust concerns

Under the applicable case law interpreting and applying Section 7 of the Clayton
Act, the critical question is whether the proposed merger will result in a "reasonable
likelihood" of a substantial lessening of competition.

SBC and PacTel are not actual competitors today. SBC and PacTel operate in en-
tirely distinct and separate geographic areas of the country, and they do not com-
pete in any relevant product market. Accordingly, this merger will have no adverse
impact upon competition by eliminating an actual competitor.

Moreover, SBC and PacTel are not potential competitors. Each company plans to
compete in the telecommunications marketplace by building upon their strengths in
areas where they have network facilities in place, an existing customer base, and
brand name recognition. This is true whether one is talking about local exchange
and exchange access, long distance, wireless, video, or Internet access services. This
means that absent the merger, SBC intended to compete only in its traditional five
state region of Arkansas, Kansas, Missouri, Oklahoma, and Texas, and out-of-region
where it provides cellular and cable television services. In the case of PacTel, it
means California and Nevada. Consequently, under DOJ's Merger Guidelines, SBC
and PacTel are not potential competitors now or in the near future.

In addition, there are many actual and potential competitors of both SBC and
PacTel in their respective geographic and product markets, which only underscores
that competition will not be diminished by this merger.^

II. THE STATE OF COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY

This portion of my testimony will briefly discuss SBC's view of the current state
of competition in the telecommunications marketplace, with special emphasis on the
long distance and local exchange marketplaces; of the Telecommunications Act of
1996 ("'96 Act"); and of the FCC's recent orders to implement the '96 Act.

A Competition before the Telecommunications Act of 1996

Over the past twelve years, the United States has experienced some competition
in both the long distance and the local exchange marketplaces. Historically, the big-
gest impediments to the development of competition have been both legal and regu-
latory barriers to entry. These legal and regulatory entry barriers at both the fed-
eral and state levels have imposed artificial restrictions on firms seeking to offer
a package of both long distance, local exchange services, and other telecommuni-
cations services.3 This has occurred despite the fact our market research tells us
that customers are demanding one-stop shopping for all their telecommunications
needs and one bill for the services they receive.

1. The long distance marketplace

In the case of the long distance marketplace, the legal barrier to entry by the re-
gional Bell companies has insulated the interexchange carriers from significant com-
petition and enabled them to keep their prices to the average consumer artificially
high. Since 1984, the marketplace for interLATA long distance services has been
dominated by three facilities-based carriers (AT&T, MCI, and Sprint), with some
other smaller facilities-based carriers and hundreds of resellers providing the bal-
ance of the "competition." At the end of 1995, AT&T, MCI, and Sprint had a com-
bined total market share of 81.8%.''

Market shares, however, do not tell the whole story. The interexchange market-
place is not characterized by the price competition that most consumers anticipated
in 1984. Rather than engage in price competition, AT&T, Sprint, and MCI have en-
gaged in what can best be described as "lock-step" pricing. The only competition
which the average consumer sees from these interexchange carriers is in the form
of advertising.

Since 1990, access charges — the charges which local exchange carriers assess
interexchange carriers for originating and terminating long distance calls — have
steadily gone down. At the same time, except for certain privileged customers who
are able to take advantage of specific discount pricing packages, the basic rates
AT&T, MCI, and Sprint have charged the remaining consumers for placing long dis-
tance calls have steadily gone up in "lock-step."^ James M. Buchanan, winner of the
1986 Nobel Prize in Economics, has concluded that "[plricing in the interLATA mar-
ket now more closely resembles an oligopoly than the perfect competition envisioned
a decade ago." ^ And Paul W. MacAvoy, former dean of the Yale School of Manage-

^As of today, 51 firms have been granted authority to become local exchange carriers in SBC's
region, and 65 such applications are pending. Similarly, as of June 1, 1996, 64 firms were grant-
ed authority to become local exchange carriers against PacTel in California, and 13 such applica-
tions were pending. These include interexchange carriers (such as AT&T and MCI), CAPs (such
as MFS and TCG), adjacent local exchange carriers (such as GTE), cable television providers
(such as Time Warner), and others.

^For example, the regional Bell ojDerating companies were prohibited fi-om providing
interLATA long distance services in competition with the interexchange carriers by tne Modi-
fication of Final Judgment. The '96 Act continues to temporarily prohibit the regional Bell com-
panies from providing in-region interLATA long distance services. Interexchange carriers and
others were largely prohibited by state law from providing local exchange services in competition
with the incumbent franchised local exchange telephone companies.

"•Table 6, Long Distance Market Shares: Fourth Quarter 1995, Industry Analysis Division,
Common Carrier Bureau, FCC, March 1996.

^Attachment 2 is a chart refiecting these access charge reductions and lock-step price in-
creases as of January 1, 1994. This chart was attached to the Affidavit of Lester D. Taylor, Pro-
fessor of Economics, University of Arizona, in support of the Motion Of Bell Atlantic Corpora-
tion, BellSouth Corporation, NYNEX Corporation, and Southwestern Bell Corporation To Vacate
The Decree, U.S. v. Western Electric Co., Civil Action No. 82-0192 (D.D.C. July 6, 1994) ("A/o-
tion To Vacate).

Since that time, AT&T, MCI, and Sprint have raised prices in lock-step on at least two more
occasions. The lastest was early in 1996. AT&T proposed rate increases for basic residential long
distance service and some business services on February 16, followed by Sprint on February 20,
and MCI on February 21. These rate increases went into effect on one day's notice.

® Affidavit of James M. Buchanan at 6, in support of the Motion To Vacate.

ment, has written a book based upon his research and economic analysis of pricing
in the long distance market which also confirms the existence of this phenomena.^
We believe that increased competition from regional Bell company entry into the
in-region interLATA long distance market will benefit consumers.

2. The local exchange marketplace

Historically, local exchange service in this country has been provided by telephone
companies which held franchises granted by the states. Under the terms of these
franchises, the local exchange telephone companies were generally the only firms le-
gally authorized to provide service in their certificated service territories. This grant
of an exclusive franchise was based upon a belief among many economists that the
provision of local exchange service was a natural monopoly.

In return for this exclusive franchise, the companies providing local exchange
service were pervasively regulated by the state public service commissions in respect
to the services which they offered the public, the prices they charged for those serv-
ices, the capital investments they made, and the level of earnings they could receive
on their investment. In addition, they had the obligation to serve all customers
within their franchised service territories — that is, to provide universal service at
artificially low rates regardless of actual costs. In order to support universal service,
the pricing structure under which the franchised local exchange telephone compa-
nies provided their services was based upon numerous subsidies. Exchange access,
long distance, and vertical services (e.g., speed dialing, call waiting, three-way call-
ing, Caller ID, etc.) subsidize local services, business services subsidize residence
services, and urban services subsidize rural services.

Despite these entry barriers, local exchange carriers like SBC have seen the de-
velopment of some competition in the form of private networks, CAPs, interexchange
carriers, and wireless.

Large customers such as businesses, office parks, hospitals, universities, and gov-
ernment entities have created private networks which completely bypass the fran-
chised local exchange telephone company. Such private networks are used to switch
calls within the network itself, and to deliver calls directly to the local exchange car-
riers, CAPs, and interexchange carriers.

CAPs — such as Metropolitan Fiber Systems, Inc. ("MFS") and Teleport Commu-
nications Group ("TCG")— have also emerged as a source of competition in the provi-
sion of exchange access services to interexchange carriers and other large customers.
In the past five years, we have seen a proliferation of the CAPs which have deployed
fiber optic rings in all major cities throughout the United States. Large customers
can deliver traffic from their private networks directly to the CAPs for delivery to
interexchange carriers and completely bypass all local exchange carrier facilities.
Moreover, CAPs can and do purchase interexchange services from the interexchange
carriers and resell those services in conjunction with their access services. Con-
versely, interexchange carriers can and do purchase access services from the CAPs
and resell them in conjunction with their interexchange services. CAPs are preva-
lent in all of SBC's major markets and provide direct competition to Southwestern
Bell Telephone Company ("SWBT").^

IntraLATA toll competition exists in each of SBC's five states. Since the prices
SWBT charges consumers for intraLATA toll services include subsidies for basic res-
idential services, interexchange competitors (such as AT&T, MCI, and Sprint) have
made major inroads into this market.

Finally, wireless has also become a source of competition in the local exchange
market. The cellular industry has seen phenomenal growth since its inception in
1984, when the FCC licensed two facilities-based cellular carriers in each market.
It has provided some consumers with an alternative to placing calls over the
landline local exchange network. Recently, the FCC has auctioned the licenses for
the new wireless service knovra as PCS.^ Thus, PCS will soon provide the local ex-
change industry with many new facilities-based competitors.

■^ Paul W. MacAvoy, "The Failure of Antitrust and Regulation to Establish Competition in
Long-Distance Telephone Service," The MIT Press and The AEI Press ( 1996).

^Attachment 3 shows the number of CAPs and the location of CAP networks in each of the
five states served by SBC.

9 There will be two 30 MHZ licenses in each of the 51 MTAs, and one 30 MHZ license and
three 10 MHZ licenses in each of the 493 BTAs. Rand McNally partitions the 50 states and the
District of Columbia into Major Trading Areas (MTAs) and Basic Trading Areas (BTAs). MTAs
serve as regional units "of wholesaling, distribution, banking, and specialized services such as
advertising" and can sprawl across several states. BTAs are smaller and represent communities
of interest where consumers obtain "specialized services, such as medical care, entertainment.

Continued

Most recently, AT&T, MCI. Sprint, the CAPS, wireless carriers, and cable tele-
vision service providers have all announced plans to step up their efTorts to compete
w-ith SBC in ofTering similar packages of products and services. For example, in the
June 12, 1996 issue of The Wall Street Journal, it was reported that Robert E.
Allen, Chairman and Chief Executive Officer of AT&T, told some investment ana-
lysts that AT&T — the largest telecommunications company in the country, with a
nationwide network, the most customers, and a brand name that is almost synony-
mous with telephony — "plans to take at least a third" of the $90 billion local tele-
phone market within the next five years. Similarly, MCI and Sprint — the nation's
second and third largest interchange carriers — have announced plans to enter the
local exchange market nationwide by investing millions of dollars in local exchange
facilities. CAPs (such as MPS and TCG) and cable television service providers (such
as TCI and Time Warner) also have announced plans to compete in the provision
of local exchange services. AT&T, MCI, MPS, TCG, and Time Warner have all re-
ceived authority to provide local exchange services in competition with SBC in its
geographic service territory.

B. The Telecommunications Act of 1996

The '96 Act became effective on Pebruary 8, 1996. This was the most extensive
re-write of our nation's telecommunications laws in the past 60 years. The promise
of the '96 Act was a removal of all legal and regulatory entry barriers, and a process
whereby over time, all telecommunications service providers would have the free-
dom to provide whatever packages of services are demanded by their customers. Ac-
cording to the Conference Report accompanying the '96 Act, Congress intended "to
provide for a pro-competitive, de-regulatory national policy framework designed to
accelerate rapidly private sector deployment of advanced telecommunications and
information technologies and services to all Americans by opening all telecommuni-
cations markets to competition."

One of the most significant objectives of the '96 Act was to open the local ex-
change telecommunications industry to competition. Congress established a new
framework for the development of local exchange competition. Pirst, it removed
state and local barriers to entry by competitors of the incumbent local exchange car-
riers, which had the effect of eliminating the exclusive local exchange franchise
granted by the states. Second, Congress imposed a set of general access and inter-
connection obligations on all local exchange carriers and some additional obligations
on the incumbent local exchange carriers, all of which are designed to facilitate the
entry of local exchange competitors pursuant to a strict timetable. Congress specifi-
cally left the particular terms and conditions of interconnection to "good faith" pri-
vate party negotiations between the incumbents and competitors. Third, in recogni-
tion of the fact that regulation of local exchange telephony has historically been an
intrastate matter under the control of state public service commissions. Congress
gave the states a significant role in the development of local exchange competition.
If and when the parties reached an impasse, Congress specifically provided that the
state commissions would arbitrate those unresolved issues. Congress further re-
quired that access and interconnection agreements, whether they are arrived at
through negotiation or arbitration, be approved by the state commissions. Pinally,
Congress specifically established the pricing standards state commissions would
apply in arbitrations to ensure just and reasonable rates for interconnection,
unbundled network elements, reciprocal compensation, and resold services. In this
regard. Congress made it clear that incumbent local exchange carriers, which are
required to make their networks and services available for use and resale by their
competitors, would recover their actual costs of doing so which may include a rea-
sonable profit.

The '96 Act also contains a mechanism whereby the regional Bell companies can
receive authorization to provide in-region interLATA services. When a regional Bell
company enters into one or more state approved access and interconnection agree-
ments with one or more competing providers of telephone exchange service to resi-
dence and business customers either exclusively or predominantly over their own fa-
cilities, or when it generally offer access and interconnection pursuant to a state ap-
proved statement of general terms and conditions if no such provider has requested
such access and interconnection, the regional Bell company may apply to the FCC
for interLATA relief

higher education and a daily newspaper." As such, BTAs can include one or more counties. Rand
McNally, 1992 Commercial Atlas & Marketing Guide 36-39 (123d ed. 1992).

1. SBC's experience under the '96 Act

Immediately upon enactment of the '96 Act, SBC began to fulfill its obligations
to open the local exchange to competition.

As a first step, SBC assembled a core group of fifty full-time negotiators, account
managers, and attorneys to receive requests for negotiations and to begin the nego-
tiation process. This core group reports to a Vice President of SWBT, who has the
full backing of SBC and access to the necessary resources to successfully compete
negotiations and to consummate access and interconnection agreements with local
exchange competitors. SWBT is also actively developing a statement of general
terms and conditions under which it will offer access and interconnection.

As of the end of August, SBC had received 55 requests for negotiation, has signed
17 interconnection agreements, has entered into 5 arbitrations of some issues with
some competitors in four of its states, and had 2 state commission approved agree-
ments. SBC currently has signed interconnection agreements with American Com-
munications Services, Inc. ("ACSI"), American Telco Inc., Brooks Fiber Communica-
tions, Dial US, Kingsgate, MFS, Texas Communications South, TCG, Time Warner,
and US Telco. SBC currently is in arbitration with AT&T, MCI, MFS, TCG, and
ACSI.

It is my understanding that other local exchange carriers are experiencing similar
success in negotiating and consummating access and interconnection agreements
under the '96 Act. This is evidence that private party negotiations and state super-
vised arbitration can work to introduce competition in the local exchange market-
place. Moreover, SBC and the other regional Bell companies have every incentive
to enter into such agreements. As indicated above, consummation of state approved
access and interconnection agreements with facilities-based local exchange competi-
tors is one way in which the regional Bell companies can obtain interLATA relief

2. The FCC's Reports & Orders

Just as the negotiation and arbitration process established by Congress is bearing
fruit, the FCC intervened to change the rules of the game in a significant and coun-
terproductive way. In doing so, the FCC has gone far beyond the limited role Con-
gress prescribed for it. The two sections of the '96 Act which define the new para-
digm for the development of local exchange competition contain only 9 pages of leg-
islative language. Yet, on August 8, 1996, the FCC released two Reports & Orders
which when combined contain over 800 pages of text, with over 4000 footnotes. With
these Reports & Orders, the FCC has replaced Congress' "national policy frame-
work" of private party negotiations and state supervised arbitration with a perva-
sive federal regulatory scheme of "national standards and rules" which define every
significant term and condition of access and interconnection. The FCC's Reports &
Orders leaves virtually nothing for negotiation or arbitration. The FCC has pre-
empted the role preserved for the states by Congress, and has, in essence, "national-
ized" control of the local exchange industry. Thus, the FCC has transformed what
Congress intended to be the rapid development of local exchange competition into
a federal bureaucratic morass of rules and regulations.

The FCC's rules are unsound not only on jurisdictional grounds, but also on eco-
nomic and policy grounds. For example, the FCC has issued mandatory pricing rules
for interconnection and access to unbundled network elements, which only allow the
use of forward-looking incremental costs based upon the use of the most efficient
technology. These pricing rules do not take into account the incumbent local ex-
change carriers' existing network design, nor the technology that is currently in op-
eration. Furthermore, these pricing rules ignore prudently made network invest-
ments reflected in the incumbents' embedded costs. Contrary to the express lan-
guage of the '96 Act, the FCC's pricing rules deprive the states of the ability to de-
termine just and reasonable rates in accordance with the pricing standards in the
'96 Act, and deprive the local exchange industry of receiving just compensation for
the use of its property.

One of the most significant goals of Congress in passing the '96 Act was "to accel-
erate rapidly private sector deployment of advanced telecommunications and infor-
mation technologies and services." The FCC's pricing rules will negatively affect the
technological development of the local exchange networks. Under the FCC's rules
neither the incumbent local exchange carriers nor their new competitors wall have
any incentive to make the necessary investments to deploy such advanced tech-
nology and services. In fact, just the contrary is likely to occur. The incumbents will
have reduced incentive to make those investments, because they will not be fully
compensated for doing so when their competitors make use of their facilities. New
competitors wall have little incentive to do so, because under the FCC's rules they
can obtain everything they need to provide a package of end-to-end services at a
below cost price with no capital at risk. In either event, the rate of new investments

in technology in the local exchange will be stifled, and innovation in local exchange
services will be retarded.

Finally, the FCC's release of its Reports & Orders also immediately brought a
great deal of uncertainty to the development of local exchange competition. The Na-
tional Association of Regulatory and Utility Commissioners and several states have
filed petitions for review of the FCC's preemption of state commission jurisdiction.
Similarly, many local exchange carriers, like SBC, have also filed petitions for re-
view. The appeals from the FCC's decisions will place the local exchange industry
and the development of competition in a state of confusion. Until the appeals are
decided, the parties will not know whether the current FCC's rules will ultimately
apply. If the court of appeals determines that the FCC exceeded its jurisdiction, the
case undoubtedly will be remanded back to the FCC with instructions. The FCC will
then have to begin a new rulemaking, and the state commissions and the parties
■will have to start the negotiation and arbitration process all over again. Surely, this
is not what Congress intended in passing the '96 Act.

ATTACHMENT 1 — BACKGROUND INFORMATION ABOUT SBC AND PACTEL

SBC is one of the world's leading diversified telecommunications companies. It is
headquartered in San Antonio, Texas and has 59,000 employees. SBC serves 14.2
million access lines within its traditional five state region of Arkansas, Kansas, Mis-
souri, Oklahoma and Texas, where it provides local exchange, exchange access and
intraLATA toll telephone services, enhanced calling services, wireless services, mes-
saging services, telecommunications equipment, and directory advertising and pub-
lishing under the "Southwestern Bell" brand name. Out-of-region in the U.S., SBC
provides wireless services in broad market areas serving portions of Illinois, Massa-
chusetts, Maryland, New York and Virginia, including the metropolitan areas of
Chicago, Washington/Baltimore, Boston, Buffalo, Rochester, Syracuse and Albany
under the "Cellular One" brand name. SBC also provides traditional cable television
services in Montgomery County, Maryland and Arlington County, Virginia. Inter-
nationally, SBC has an equity ownership interest in local and long distance service
companies in Mexico, Chile, and the United Kingdom; in wireless service companies
in Mexico, France, Chile, South Africa, and South Korea; in cable television compa-
nies in the United Kingdom, Mexico, France, Chile and Israel; and in directory pub-
lishing in Israel and Australia. Over the past five years, SBC has lead the regional
Bell companies in revenue growth and earnings. This year, SBC was identified by
Fortune Magazine as "America's most admired telecommunications company."

PacTel is also one of the regional Bell companies. Its headquarters are located in
San Francisco, and it has 49,000 employees. PacTel serves 15.8 million access lines
in approximately 75% of California, including the major metropolitan areas of Los
Angeles, San Diego, and San Francisco, and 33% of Nevada including Reno. It pro-
vides local exchange, exchange access and intraLATA toll telephone services, voice
mail and other information services, Internet access services, network integration
services, and directory advertising. PacTel also owns personal communications serv-
ices ("PCS") licenses to provide wireless services throughout California and Nevada.

Trends in Long Distance Rates and Exchange Access Charges

LongDiaance Riiu

Accus Charges

'I/SO 7/l/SO ,/,^, 7/1/91 1/1/92 Tim 1/1/93 7/1/93 1/1/94

Source: WEFA Group. Economic Impacr of Eliminating Trte Une-of Business ResTnctions on the Bell Companies.
July 1993: Robin Gareiss. Rate Hikes: MCt, Spnnt Follow AT&T's Lead. Communications Week. August 9. 1993,
at 60: Dan Reingold. Memll Lynch Global Sacunttas Research, LD Ir^dusrry Benefrts trom AT&T Price Hike. Again.
Jan. 25. 1994; Enc Paulak. AT&T. MCI Jack Up Rates Again. Network World, Jan. 24, 1994, at 37 With the
exception of the two most recent rate increases, long distance rates are based on the average prrce per mmute tor
basic service. For the two most recent rate increases, rates are estimated as the average of their stated range of
rate increases, if a rar^e was announced. AT&T rates are estimated as the average of rts business rate increases
and Its residemial rate increases - a conservative estimate, corisidenng that more revenue comes from business
customers than h-om residential customers.

Attachment 2

Comprfitive Access Providers In Southwestern Bell Telephone Company's Territory

NOT£&: (s) vsckr aooctrucbaa. (b>
STATUS: OpcnCMod k dafioed

CAP Operation

City

State

Mrkt
Area

Status

Year
Started

Route
MHes

Bldgs

Srvdfb)

Switches
Tniratled

Aaencm OTnTmimimfimi

UttleRock

OperatiaiaJ 1 1994

3rooks Fiber ProDGties

Lane Rod:

OpenZioBial

1994

Tme Wamer Conranmatiooa
.'TWO of Fsvtaenllc

LuJleHodc

AB.

Planned

1996

ACS

Aistia

C4.WT

Planafid

1994

MQ Metro

Austin

CfeWT

Dcvdopin^

1995

MaroAccesi

Austm

OStWT

Ooeranonal

1995

40(a)

MetropoliOD Fiber Svstoia (WFS)

Austin

C&WT

1994

TWCofAnaia

Austm

CiWT

ODoOional

1994

120(a)

ACSI

HPko

CiWT

Opeiitianal

1994

3rt)ofa Fiber Properties

aPsso

C&WT

Planned

1995

GST Tdemmmimicsaoos

HPaso

C&WT

Planned

1995

Metro Aettss

HPaso

C&WT

piatmed

1995

TWCofaPiso

HP«so

CStWT

Deveioomt

1995 1

Telepon Cammnmemau Group

Labboek

CiWT

Ptaaed

1994

MaMeOD

DaUas

DFW

Ooerational

1994

Pm*r,r

Me&D Access

DnUtis

ESTV

Opetaumal

1995

MPS

Dallas

DFW

Opgannnai

1990

141

209

Insalled

TCG

Dallas

rrw

Opeiatiaeal 1 1990

303

Installed

7WC of Dallas

Dallaa

rffw

Planned

1995 1 1

ACS

Fort Worth

DFW

OoeraticBal

1994

Metro Access

Fort Worth

DFW

Opgnnnnal

1994

105

TCG

Fort Worth

DFW

1994

Ma Metre

Houston

DereioDiiif

1994

MFS

Hoostoc

Operaaonal

1989

259

165

HoustoQ

1989

400

35 1

TCG

Houston

Ooentusial

1990

317

115

fn^n^Hi

TWC of Houston

Houston

1994

265

MFS

Kansas City

MOiKS

Planned

1992

KsnssB City Fibetnet

Kansas Cilv

MOiKS

Oceraccnsl

1986

250

SntiMifield Fiber Net

Spcingfidd

Plannal

1992

Kiaaci

Various Cities

Oixntiaoal

1989 ^

1200

Hypenoo Ti-WnniTmniinitim'i

Widuta

OpetatiaDal

1993

130(a)

Brocto Fiber Proceities

OldahomaCitT

1994

88(a)

Cox Fibonei (TCG AfShnc)

CSdahoma City

Oooltiaoal

1991

Dobson Fiber

CSiahomaCitv

OnczaQooal

1992

OUataaa City

OK.

Develonmg

1994

MFS

Oklahoma Cir,'

Planned

1995

Broola Fiber ProDerties

Tulsa

1986

105

MFS

Tulsa

Planned

1995

Duital Tdeoott

St Loms

Devdonnu!

1994

Sl Loins

Devdoomg 1 1993

481(a)

348

MQ Metro

St. Louis

Devdoom)! 1 1994

MFS

St Louis

Ooeiaticoal

1992

hittallcd

SP Telecom

St Loms

1994

TCG

St Loms

Oooamxial

1993

CSW ComnnmicaDaiis

Haiiin^en,
McADen

Opsaconal

1994

200

CSW ConnnujjicBtions

Laredo

1995

TWC CFitacom)

Laredo

Planned

1994

ICG ADcess Semcej

San Ant^io

Planned

1995

306

Me&^ Access

SanAstomo

n^irliiitinp

1995

TWC (Fibrcaii)

Ooennonal

1992

248

Attachment 3

Competitive Access Providers In Sonthwestem Bell Telephone Company's Territory

CAP Openrtioa

^^mgiom ConaMonitaliopt Sennoa . fee (ACST) - Austin

Sopixes:

CeaxOxm Koanfa Rqxnt lOfOV9i, T«loo Oompttiliati Report 0MVV?4

ACSI - Port Worth

OnmortifTtt RjM«rfi lUport IOA>l/>5. Fjl Worth Stg Ttfcig»g OVH/X

ACSI - Liolc Bixic

Ownrrtttiit Bi ilfrti »<port 1(M)1j9j,

BroiJoFibg- P i U M U t i g-HPMO

atyFrapdntHBag WWH

BtadanberfropMliB -Link Rack

Crmrrtinlt F.I ■MHU Report ia/PL/93

ftoela ra>€r P m» ili « > - n i rt »hrm» Qty

RnirfiReport 10^1/95. T«kco.iBDnpioBi<»» R«(»rt» 07/[>*^

Btoobi FibK Fttpoftkm - Tula (Fonnoly FSO MttroLmicj
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JOBTMI 01/U9«

The Chairman. Mr. Ebbers.

STATEMENT OF BERNARD J. EBBERS

Mr. Ebbers. Good afternoon, Mr. Chairman and distinguished
members of the committee. My name is Bernie Ebbers. I am the
president and CEO of LDDS WorldCom, one of the four largest
long distance telecommunications companies in the United States,
headquartered in Jackson, MS. WorldCom offers domestic and
international voice, data and video products, and services to busi-
ness customers and other carriers, including the residential mar-
ket. The company operates a nationwide digital fiber optic network
and has worldwide network capacity. WorldCom was founded in
1983 as a long distance reseller and I have served as its president
since 1985.

I can't resist asking the famous political question from the 1992
Presidential debates. Why am I here? I find it a little bit peculiar
to be in the midst of companies who sent their pit bulldogs as at-
torneys to represent them instead of other CEO's, but my under-
standing is that the members of this committee have some interest
in a merger we announced last month.

WorldCom and MFS Communications Co., Inc., have executed a
definitive agreement and plan a merger. MFS is a leading provider
of communications services for businesses and government. It has
led the way in toppling legal barriers to competition in the local
telephone markets and is constructing and operating new fiber
optic networks in 45 cities nationwide and internationally, financed
with our own money, not with ratepayers' money.

Our combination with MFS will indeed create a uniquely inte-
grated telecommunications firm providing a single source for a full
range of local, long distance, Internet, and international service
over an advanced fiber optic network. The novelty of our deal stems
from the fact that neither the local network portion of the consoli-
dated entity nor the long distance portion is an incumbent monop-
oly or a former monopoly. Like WorldCom, MFS is a young entre-
preneurial upstart with no captive customers plunging headlong
into competition with much bigger and more established players in
the industry.

What every company in this industry wants to accomplish is to
be able to provide end-to-end service over a single company's own
facilities. I believe the combined company will be a leader in assist-
ing businesses to harness the full power of the Internet-based tech-
nologies. I am particularly excited about our combined ability to
meet the explosive demand for corporate intranets utilizing tech-
nologies and facilities available from a single source. The combined
company can also advance U.S. competitiveness overseas by comb-
ing MFS's and WorldCom's international positions, particularly in
Europe.

Thank you very much.

The Chairman. Well, thank you.

[The prepared statement of Mr. Ebbers follows:]

Preparfd Statement of Bernard J. Ebbers

Good morning Mr. Chairman and distinguished members of the Committee. My
name is Bernard J. Ebbers. I am the President and CEO of LDDS WorldCom, one

of the four largest long distance telecommunications companies in the United
States. Headquartered in Jackson, Mississippi, WorldCom offers domestic and inter-
national voice, data, and video products and services to business customers, other
carriers and the residential market. The company operates a nationwide digital
fiber optic network and has worldwide network capacity. WorldCom was founded in
1983 as LDDS Communications, a long distance reseller, and I have served as its
President since 1985.

That is the same year the Bell Companies began their massive 10 year lobbying
campaign to get Congress to reverse the brand new antitrust consent decree that
separated them from AT&T, kept them out of the long distance business, and or-
dered them to provide equal access in order to promote competition and lower prices
for long distance services. It's fairly obvious that the 1984 antitrust decree is a com-
petition success story. Both business customers and American consumers every-
where have enjoyed long distance calling and faxing at pennies per minute, afford-
able international calling, economical inbound 800 services, easy Internet access and
more. People typically choose from more than half a dozen carriers vying for their
long distance business. Cash incentives are not uncommon even for households
within modest usage.

By the mid 1990's, Congress was ready to answer the Bells' call for legislation.
A consensus developed that Americans deserve the same benefits of innovation and
competition in local telephone service as they have enjoyed in long distance service.
So after countless false starts. Congress last February passed the very pro-competi-
tive Telecommunications Act of 1996. As you know, the new law is both a long over-
due update of the antiquated 1934 Act, which based all telecommunications on a
regulated monopoly utility model, and a rational plan for dismantling the 1984 con-
sent decree. The '96 Act directs the FCC and the states to eliminate monopoly condi-
tions in local telecom services and promote competition.

The Bell Companies will be permitted to sell long distance services within their
regions once certain competitive conditions have been met in local markets on a
state by state basis. The Bells will then be free to offer their customers one-stop
shopping and full service packages.

Last year, some in Congress actually expressed hope that the Bell Companies
would compete against one another in the local telephone business. After aU, they
do so in the cellular service business and in publication of directories. But so far,
for technical reasons of spectrum allocation, the cellular business is a cozy duopoly
in each market. And directories are not reliant on monopoly local networks. Real
competition in regular local telephone service is much more elusive. No Bell Com-
pany is competing for the captive local customers of any other Bell. Ironically, de-
spite their recognized expertise in the provision of local telephone service, not one
of the Bells' applications to offer service in an out of region state requests certifi-
cation as a local carrier. And by planning their mega-mergers, four of the Bell Com-
panies have made their non-compete policies official.

Soon after the Act was passed, a close-cousin of the Bells, GTE, broke onto the
scene in the long distance industry. Using both its local exchange networks scat-
tered around the country and long distance network capacity purchased at competi-
tive rates from WorldCom, GTE signed up a quarter of a million long distance cus-
tomers in its first few months of long distance operations. GTE is offering one-stop
shopping for local and long distance to its business and residential customers. And
GTE is not alone. Southern New England Telephone (SNET) has been doing like-
wise in Connecticut. The problem is, almost no one in America yet has a choice for
local telephone service or a choice of full service vendors.

I can't resist asking that famous political question from the 1992 Vice Presidential
debates, "Why am I here?" My understanding is that members of this Committee
have some interest in a merger we announced last month. WorldCom and MFS
Communications Company, Inc. (MFS) have executed a definitive agreement and
plan of merger. MFS is a leading provider of communications services for business
and government. It has led the way in toppling legal barriers to competition in local
telephone markets, and is constructing and operating new fiber optic networks in
45 cities nationwide and internationally. Our combination with MFS will indeed cre-
ate a uniquely integrated telecommunications firm providing a single source for a
full range of local, long distance, Internet and international service over an ad-
vanced fiber optic network. The novelty of our deal stems from the fact that neither
the local network portion of the consolidated entity nor the long distance portion is
an incumbent monopoly or a former monopoly. Like WorldCom, MFS is a young, en-
trepreneurial upstart with no captive customers, plunging headlong into competition
with much bigger, more established players in the industry.

In fact, as the new Telecom Act and the FCC have recognized, all new entrants
in local telecom markets, including ourselves, will continue to rely substantially on

the incumbent local exchange carriers for interconnection with their single ubiq-
uitous switched network. That is why the FCC agonized for months and its staff
worked round the clock earlier this summer to craft the interconnection rules that
will make competition possible. The billions of dollars of investment already spent
and planned to be spent by MFS and many others in local fiber rings, local switches
and more cannot begin to fully duplicate existing Bell networks that reach into
every home and office in their regions. In other words, we and other new entrants
will continue to rely on Bell interconnection even where we have our own facilities,
and that dependence will be far greater in markets where we still lack our own fa-
cilities.

So I am truly flattered at the attention bestowed on us by the Judiciary Commit-
tee. With a whopping 5% market share in long distance, I expect our teaming up
with a company having even less than 19c market share in local service amounts
to a big yawn in terms of antitrust issues. I guess it is the boost in the potential
for real local competition that has attracted most of the media attention. And inci-
dentally, World Corn's success should certainly dispel those tired old Bell claims of
some cozy oligopoly or cartel controlhng the long distance business.

To fill in some of the details: the combined company will be known as MFS
WorldCom. We hope to complete the merger within four to eight months. Since
WorldCom's networks will connect to MFS' city networks, we expect to achieve sig-
nificant cost savings from reduced line and access costs. The merger will also elimi-
nate duplication of capital spending programs, including those for undersea capac-
ity, international facilities and MFS' planned U.S. intercity network. MFS recently
merged with UUNET, a leading provider of a comprehensive range of Internet ac-
cess options, applications, security products and consulting services. The combined
MFS WorldCom will be uniquely positioned to deliver competitive services that will
help meet the ambitious goals of the new Telecom Act.

What every company in this industry wants to accomplish is to be able to provide
end to end service * * * over a single company's own facilities. I believe the com-
bined company will be a leader in assisting businesses to harness the full power of
Internet-based technologies. I am particularly excited about our combined ability to
meet the explosive demand for corporate "Intranets" utilizing technology and facili-
ties available from a single source. The combined company can also advance U.S.
competitiveness overseas by combining MFS' and WorldCom's international posi-
tions, particularly in Europe.

1 was asked to describe some of the effects our combination with MFS will have
on competition and whether there will be anticompetitive effects. I have already
suggested some of the positive effects on competition, but you may be more inter-
ested in what outside observers have said. First, in terms of local telephone service,
the Wall Street Journal on August 27th reported that "In the past four years, MFS
has done for local service competition what MCI originally did to break AT&T mo-
nopoly in long distance * * * various proposals, such as allowing local customers
to switch carriers and keep their original phone numbers were pioneered by MFS."
The Jackson Clarion Ledger reported on the same day that the merger "positions
WorldCom to take on the Baby Bells." In other words, it positions us to avoid being
crushed by them. According to USA Today, "the merger would help MFS and
WorldCom fight the big boys."

Secondly, in terms of effects on competition in long distance, the Clarion Ledger
quoted industry analysts as saying "the merger produces a true fourth competitor
to the biggest long distance providers AT&T, MCI and Sprint." According to the
Wall Street Journal, "combining with MFS effectively pushes WorldCom into new
markets where it needs to operate if it is going to keep up with the other long dis-
tance giants." USA Today reported that "the deal could make the combined com-
pany, MFS WorldCom, a major player in telecom, just a rung below the regional
Bells, GTE, MCI, AT&T and Sprint." USA Today also predicted MFS WorldCom
"could be a next generation MCI" and that we "may help push down local and long
distance rates."

In terms of anticompetitive concerns, I respectfiilly suggest they are non-existent
in the case of MFS WorldCom. USA Today quoted analysts saying that "the compa-
nies are merging because they have to." "Big telecom finds are getting bigger and
moving toward one-stop shopping. Witness Bell Atlantic and NYNEX announcing
they will merge as will SBC and Pacific Telesis. It's a defensive move for both
[WorldCom and MFSJ."

Unfortunately the Bells still have a monopoly on anticompetitive effects in tele-
communications. Their state and local political clout is matched only by their com-
plete market dominance and both are simply unparalleled in modem industry. Com-
binations of these monopolies violate the pro-competitive spirit of the new Telecom
Act. They extinguish some of the best potential for local competition. My personal

view, although I am no antitrust expert, is that competition needs a chance to de-
velop before the monopolies just get bigger.

Hopefully our new bundled services will become uniquely attractive to our cus-
tomers. But unlike the Bell Companies, we will never be able to sell a bundled pack-
age on the basis of the fact that the customer has no other choice of vendor for any
one piece of that package.

The Chairman. We will allow for 7 minutes of questioning per
person here. Let me just ask a few questions and all three of you
can answer, if you would care to. If you don't care to, just say so.

As I understand it, the Telecommunications Act was designed to
promote competition among providers and increase consumer
choice primarily by breaking down regulatory barriers and permit-
ting everyone in the telecommunications industry to get into com-
petition with one another with everyone else's business.

I guess this question is directed to Mr. Young and Mr. Ellis. How
would your merger be consistent with these goals? Mr. Young.

Mr. Young. First of all, as I indicated in my written testimony
and my oral remarks, we think this combination is going to better
position us to compete with the likes of MCI-British Telecom, with
AT&T, and with Sprint and its other European backers. This is a
market where size matters, where size and scope are critical to de-
velop customer brand identification, in developing the kinds of effi-
ciencies that Mr. Ellis was talking about; scale and scope in pro-
curement; scale and scope in research and development, which is
a critical factor going forward. The greater size of the company is
going to better enable us to be a ftill-service provider competing
head to head with the likes of AT&T, MCI, and Sprint.

The Chairman. Mr. Ellis.

Mr. Ellis. Well, Senator, I would say that I think that the prom-
ise of the legislation was to introduce competition with or without
our kind of merger. In the Southwestern Bell territories of 5 States,
we have, as I speak, 115 — latest count, I believe — applications for
competitors to come in and provide local exchange telephone serv-
ice. That speaks for itself. Pacific Telesis has something approach-
ing another 100 competitors who are coming in under the Tele-
communications Act to go into the market and compete for local ex-
change telephone service.

Our merger, I think, will make us a stronger competitor, both in
terms of the local exchange business, but also, more importantly,
it will make us a better competitor in the long distance business.
We will start with zero market share in long distance and we will
go into it and be vigorous competitors, and we will be more vigor-
ous and better competitors with the combined company than we
would have been otherwise.

The Chairman. Well, some of our panelists today may very well
suggest that you ought to satisfy certain conditions, such as inter-
connection performance standards or compliance with section 271
of the Telecommunications Act, before your merger is approved by
regulators. Interconnection performance standards, as I understand
it, are already provided for in the Telecommunications Act and sec-
tion 271 governs the Bells' entrance into the long distance market.

Frankly, I do not believe it is proper to include either of those
conditions as part of the antitrust legal analysis that should be ap-
plied by regulators to your mergers. What is your view? I take it
you agree with me on that.

Mr. Young. I am hard-pressed to disagree, Mr. Chairman.
[Laughter.]

The Chairman. Hard-pressed to disagree. I like witnesses who
agree with me. In fact, I even Uke witnesses who don't, but that
is one thing that I am concerned about.

Mr. Ebbers, what is your feehng about that?

Mr. Ebbers. Well, Mr. Chairman, if we had any reason to feel
comfortable with the fact that they would comply with the checklist
if the merger went through, it wouldn't be an issue. But we cer-
tainly don't feel confident that that will occur and I, for one, believe
that should be a precondition.

The Chairman. Mr. Ebbers, I congratulate you on what certainly
appears to be a very impressive record of growth with your com-
pany and, as you put it, "plunging headlong into competition with
much bigger, more established players in the industry." I believe
that such entrepreneurial success stories are vital to the American
economy.

What are your goals for local exchange market share in the next
5 years?

Mr. Ebbers. Market share?

The Chairman. Yes.

Mr. Ebbers. Mr. Chairman, it is so small that it is hard to put
a percentage on it. We are currently building out local networks,
our own local networks, in 45 markets and intend to expand that
to 85 markets over the next 3 years. And if we are as successful
as we think we will be, we would still be substantially less than
10 percent of the market.

The Chairman. Doesn't your merger with MFS and your pro-
jected growth for the merged company in the local exchange mar-
ket prove that there already is competition in the local exchange
market and that it is likely to be much more competitive in the
coming years? Doesn't it kind of show that?

Mr. Ebbers. Mr. Chairman, certainly this merger, the ability to
combine with the local exchange company, is the result of a very
good telecommunications bill and an absolutely tremendous ruling
by the FCC on the interconnection order. Those people are to be
complimented greatly on what they have done. That was the driv-
ing force behind this.

But the fact of the matter is that even though we have agree-
ments with six of the regional Bell operating companies — the one
missing is U.S. West and that is almost impossible to get so we
have kind of laid that aside — none of those agreements meet the
checklist and they are substantially different from the checklist.
But because we are investing in our own local facilities, we are
going ahead and trying to compete on whatever basis we can.

The Chairman. OK. Now, how much of an advantage do you
think an incumbent local exchange provider would have in the long
distance market due to customer loyalty and/or preference for so-
called one-stop shopping?

Mr. Ebbers. Well, they have a tremendous advantage, and the
whole goal of our company is to position ourselves so that we can
have access to an originating customer. One of my fellow panelists
mentioned a little while ago that they do not have any long dis-
tance revenue. Well, that is just not true. They have a substantial

amount of intraLATA revenue and, in addition to that, have mas-
sive plans out to extend local calling areas so that they can rede-
fine a long distance call from long distance to local.

The Chairman. But don't you think it works both ways; that is,
wouldn't an incumbent long distance provider have an advantage
in the local market due to customer loyalty or for preference for
one-stop shopping?

Mr. Ebbers. Well, we don't know how loyal the customer is be-
cause they have never had a choice.

The Chairman. So you are not sure what the answer is to that?

Mr. Ebbers. No. We are very confident that the customers will
choose the best provider of services, and we intend to be one of
those.

The Chairman. Well, let me just go back to Mr. Young and Mr.
Ellis. Just one last question. It has been suggested that the re-
gional Bells have a unique capacity to compete with each other due
to their experience in delivering local exchange service. Do you
folks agree, and who do you see as your primary competitors in the
near future, and who do you see as your primary competitors in the
residential markets?

Mr. Young. Mr. Chairman, I think when you look at who are the
primary competitors in the local exchange, the list is pretty logical.
It is people who already have facilities in place to compete. It is
people who already have customer contacts in business in place.
That is the long distance carriers, that is the cable companies, and
it may well in the future be wireless providers.

In particular, in addition to those elements, companies like
AT&T have just enormous presence with the customer. If you
stopped 10 people randomly in almost any city in the country and
asked them who their local exchange carrier is, they would tell you
AT&T. So they are the people who are really best positioned to
compete in our market.

As for Bell Company competing with Bell Company, maybe the
best example I can give to you, there is just a couple months ago
the FCC had a proceeding on competition in New York in connec-
tion with a regulatory issue we don't have to go into in great detail
here. The FCC went through all the people that they thought were
going to compete in New York. We weren't on the list.

The Chairman. Mr. Ellis.

Mr. Ellis. Well, I would agree with what Mr. Young said. AT&T
I accept at their word; that is, their intention is to obtain in the
next 5 years approximately one-third of the local exchange busi-
ness. But I want to come back to what I said before. We have peo-
ple voting with their entry into the business today. We have 115
companies who have filed applications to get in the local exchange
business in our 5 States today and there are approximately 100 in
California and they include all the big ones, the household names.
So, I think there will be an abundance of local exchange competi-
tion.

The Chairman. Mr. Ebbers, do you have any comment about
that?

Mr. Ebbers. Well, the only significant part is that it doesn't take
a lot of effort to file an application. The ability to do it on a profit-
able basis is an altogether different matter.

The Chairman. We will go to Senator Leahy first, since he was
here earlier.
Senator Leahy.

Senator Leahy. I will yield to Senator Feingold.
The Chairman. Senator Leahy will yield to Senator Feingold.

STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR
FROM THE STATE OF WISCONSIN

Senator FEINGOLD. Thank you, Mr. Chairman, and thank you,
Senator Leahy. I thank our witnesses for being here today. I and
other members of this committee requested this hearing after the
second of two mergers of regional Bell operating companies
[RBOC's] was announced this spring.

The 1996 Telecommunications Act promised to open up to com-
petition markets which were previously closed either by technology
or regulatory barriers. Cable companies were to compete with the
local exchange monopolies, and vice versa. Long distance compa-
nies would be able to enter markets for local service, and the
RBOC's were going to compete not only in long distance, but with
each other, for local service. All of this promised competition was
to provide lower prices, better service, and more choices to consum-
ers.

The mergers discussed by this first panel, however, raise serious
questions about whether the 1996 act will actually make good on
its promise. Media reports indicate that both long distance rates
and cable rates have increased since the bill was enacted, and
many companies have proposed to increase local telephone rates as
a part of the implementation of the act. And now the most likely
competitors to the RBOC's in local service according to some tele-
communications analysts, and other RBOC's, are merging with one
another. The rash of merger activity in broadcast and cable also
suggests that concentration, not competition, has been the result of
the Telecommunications Act, at least in the short run.

The benefits to consumers that would have resulted from com-
petition between these merging entities may be lost if they are ap-
proved. The question is, Will any of the efficiencies gained from the
merger be passed on to consumers, and if so, will those savings ex-
ceed those possible under a more competitive market?

Mr. Chairman, I ask unanimous consent that the rest of my
statement be placed in the record.

The Chairman. Without objection, we will put it in the record.

[The prepared statement of Senator Feingold follows:]

Prepared Statement of Senator Russell D. Feingold

I want to thank Chairman Hatch for his wilhngness to hold this hearing today,
in response to a request Senator Leahy, Senator Kohl and I made earlier this year
to examine the very critical issue of competition in telecommunications markets. We
asked for the hearing following the announcement of the proposed mergers between
Bell Atlantic and NYNEX and between SBC and PacTel.

These mergers raise the question as to whether the goal of the 1996 Tele-
communications Act to encourage and promote competition within both established
and emerging telecommunications markets is being achieved under the Act.

Congress designed that Act to allow providers of different types of services to
enter into other areas of business. It was expected that cable providers to compete
with monopoly local exchange companies in providing local service. It was expected
that the regional bells operating companies would begin competing with one another
to provide local and long distance service, and to provide extensive video program-

ming and cable service. Congress also eased the rules under which the RBOCs could
enter the lucrative long distance market in order to increase competition in that al-
ready-competitive market.

The proposed mergers we are focusing on today however, raise the question of
whether or not consumers will actually see greater competition in telecommuni-
cations and its associated benefits of lower prices, more choices and better services.
It is unfortunate that some of the companies represented her today will be partners
instead of competitors.

I recognize that mergers are not inherently anti-competitive and in some situa-
tions can provide tangible benefits for consumers. But I think this Committee has
to examine some of these mergers by asking "How much competition in these mar-
kets is precluded by the merger compared to the real or perceived benefits to con-
sumers under the merger?" Will consumer prices fall as a consequence of the merg-
er? Would they have fallen more in the absence of the merger? Is it possible that
rates will rise as a result of the mergers?

Those are important questions in the context of the 1996 Telecommunications Act.
When we considered that bill earlier this year, I was extremely concerned that the
legislation permitted far too much concentration in a nvimber of telecommunications
markets and that shareholders, not consumers, would reap the benefits of this legis-
lation. In light of both of the proposed mergers and the progress of the rulemaking,
I am still concerned that the promise of the bill has been overstated.

An August 11, 1996 Washington Post article suggested the benefits of the Act may
have been overstated by its proponents. It states:

Six months after enactment of the landmark Telecommunications Act of
1996 — the law that is supposed to foster competition in cable and phone
rates — the only thing that has changed for consumers is that their cable
and long-distance bills are higher not lower.

I was equally concerned earlier this year by the proposals submitted to the FCC
to increase local phone rates by $2.50 to $11.00 per month, as part of the move to-
wards competition. I wonder how popular this legislation would have been earlier
this year if consumers were told to expect local rate increases as opposed to the rate
decreases promised them.

Merger activity hasn't been limited to the telephone industry. Since the enact-
ment of the Telecommunications Act there have been a rash of proposed mergers
between companies that were also likely competitors with one another.

I am concerned about the implications of the proposed mergers:

between U.S. West and Continental Cable — two companies that could compete
to provide both cable and television;

between Time Warner and Turner Broadcasting — a merger which increases
concentration in the cable industry; and

between Westinghouse/CBS and Infinity, creating a broadcasting powerhouse.

FCC Chairman Reed Hundt said in June, the Commission's Mass Media Bureau
had already processed 2,100 assignment and transfer applications for radio and tele-
vision, a 42% increase over the previous year. That is in response to lifting of broad-
cast ownership restrictions. Again, more concentration — not more competition.

This extensive merger activity raises the questions of who controls and dissemi-
nates information in this country, and how many different voices we want relaying
that information.

This Committee has a responsibility to carefully examine the implications of these
mergers, not just from the pure anti-trust angle of whether the mergers should be
approved. It is clear that we must urge the Department of Justice and other regu-
latory bodies to carefully review these mergers and to impose conditions where nec-
essary. However, we must monitor whether the legislation enacted earlier this year
is achieving its fundamental goal of increasing competition in telecommunications,
rather exacerbating concentration.

Senator Feingold. Let me use part of my remaining time to ask
Mr. Young and Mr. Ellis a question. You both apparently indicated
prior to my arriving that you didn't consider your partners as po-
tential competitors. I guess I am wondering about that because so
many RBOCs indicated an interest in competing in each other's
market for many types of communications services just a few
months ago when we were debating the telecommunications bill.

Could you tell me why the markets of your partners aren't at-
tractive to you for any line of telecommunications service, as I un-

derstand a lot of long distance originates in those regions? And as
a followup, are you considering entering the markets of any other
RBOC's? Let's start with Mr. Young.

Mr. Young. Yes, thank you, Senator. One thing I think I do have
to take issue with is the assertion that the Bell companies were the
most logical competitors of the other Bell companies. I would like
to direct you, if I could, to my written testimony. One of the things
I tried to do in preparing for this testimony to sort of test that was
to go back into 1995 and look at what the Justice Department said,
look at what the administration said, look at what the FCC said
when they talked about who were the most likely people to get into
the local exchange business.

Now, the people they listed were the long distance carriers. They
listed wireless companies, they listed cable companies. But as I
point out in my written testimony, you can go through statement
after statement, filing after filing, and the Government did not
point to Bell companies as logical competitors to go into other Bell
territory, and the reason for that, I think, is pretty logical.

The reason is that in considering where you want to expand op-
erations, you want to do that where you already have facilities in
place, where you already have customer contacts, where you al-
ready have name recognition. For example, in New York, AT&T
has that. The cable companies have that. The long distance carriers
have that. A lot of the wireless companies have that. I don't have
that. I don't have any significant advantage, so that is why that is
not a logical place for me to enter.

Senator Feingold. Did you have any problem with my represent-
ing, though, that the RBOC's had indicated an interest in compet-
ing in each other's areas? Is that an accurate statement of what
was, in part, part of the discussion?

Mr. Young. Senator, as I grow older, my memory grows foggier,
and the record is what the record is, but that is certainly not my
recollection.

Senator Feingold. Mr. Ellis.

Mr. Ellis. Yes, Senator. I have a little bit different situation in
my answer. As I said, our files confirm that we had no plans to go
into California, and California had no plans — that is, Pacific Tele-
sis — to come into SBC's territory. SBC has a presence in Chicago,
Boston, Washington, Baltimore, and a major part of New York. We
are active competitors with NYTMEX, Bell Atlantic, and Ameritech.

I think that by most measures, we are probably among, anyway,
their largest competitors, SBC is, no question about it, and we will
grow that b siness in those areas. We have filed to be a local ex-
change competitor in New York and in Illinois. We will be a full,
one-stop provider — local exchange, long distance, and cellular — in
those places. Our plan, however — and the reason we are not poten-
tial competitors with Pacific Telesis is based on this. We believe it
is important to have three components present before you move in.
One, you need facilities. Two, you need branch identification.
Three, you need customers.

Now, not in every case — ^you can go ahead and try and go in, but
when you have the opportunities we have to pursue the situations
I have ticked off, plus others, we had chosen a long time ago not
to go into California for those reasons. Our files — the Justice De-

partment has had them; they have looked at them; longstanding.
That has been our plan. We were not a potential competitor for Pa-
cific Telesis, but indeed we are a potential competitor in those situ-
ations that I have outlined.

Senator Feingold. Thank you. Let me go back to Mr. Young for
a minute on the specific example of Bell Atlantic and NYNEX. It
was a matter of public record some time prior to the announcement
that there were discussions going on, and, I guess, what I would
like to ask you is, Did Bell Atlantic first examine the competitive
opportunities available to them in the NYNEX region, particularly
in the States where your service areas abut one another? Was that
examined or did you just go forward with

Mr. Young. The answer to the question is, yes; we did examine
that. Actually, you might be misled when you look at a map. You
might think that our service territories abut all the way along the
New York border, all the way along Pennsylvania. Actually, that
is not true. A lot of that is independent telephone company terri-
tory. Really, it is just New York and across the river to New Jer-
sey.

We looked at that, but we concluded pretty much along the lines
that Mr. Ellis described that it wasn't worth the candle for us to
go in because we did not have facilities in New York. We didn't
have a customer presence, and we didn't think we had anything
significant by way of brand identification.

Now, even there you might say to yourself, OK, but, look, we
have telecommunications facilities in northern New Jersey.
Wouldn't we think we had some advantage? We could just extend
the wires under the river and use that plant that we had in New
Jersey to serve in New York. What we found out was that that was
not the economical thing to do. There is already so much traffic in
New Jersey and the area that you can serve with those facilities
in New Jersey. Because of the traffic loads, you really can't extend
into New York. So, yes; we did have a careful look at it, but we
decided long before the merger discussions that this was not a mar-
ket we wanted to enter.

Senator Feingold. Do I have more time, Mr. Chairman? Just
one more question, if I may.

Senator THURMOND [presiding]. Yes.

Senator Feingold. Thank you very much, Mr. Chairman. Just to
follow on sort of what you were talking about there, you wouldn't
have done this merger if it didn't involve sufficient cost efficiencies
to be gained, and I saw in your press materials at the time of the
merger announcement that the Bell Atlantic-NYNEX merger will
result in cash savings of $900 million a year. Your press materials
reported that would result in substantial shareholder value, but as
far as I saw it didn't mention the benefits to consumers.

How specifically will those cost savings be passed down to con-
sumers, and what do you anticipate the average savings might be
to ratepayers and how soon might those savings be realized?

Mr. Young. Well, if I could take that question in pieces, first of
all, even before the merger we think we have been doing a good
job in passing along our efficiencies to our customers. We have in
Bell Atlantic, in almost all our States, and NYNEX has in almost
all their States — one exception is Vermont, where it is being nego-

tiated — price cap plans that basically freeze residential rates and
gxiarantee that over the life of the plan, those rates will go down
compared to inflation. Now, that is really sharing cost savings with
customers.

One other area, though, where I think customers are really going
to see the benefit here, is in new services. You know, it is an ex-
pensive proposition to build out our networks so that we can pro-
vide new services and, for example, compete with the cable compa-
nies. The greater size of the new company will be able to get equip-
ment at better prices. This is particularly important when you are
talking about cutting-edge equipment, new technology. You want to
get your volumes up so you can get the unit costs down because
that is the way this industry works.

By putting the companies together, we are going to be able to get
better prices to upgrade our network so that we can compete with
the cable companies, and that also is going to provide a very real
consumer benefit.

Senator Feingold. I thank the chairman and simply want to say
if there is any way I could get this quantified, and the timeframe,
subsequent to this hearing — I have run out of time — I would appre-
ciate it so I could get a little better sense of how the consumers
will benefit. I thank the witnesses. Thank you, Mr. Chairman.

Senator Thurmond. Mr. Young, Mr. Ellis, and Mr. Ebbers, in
that order, will each of you please give us your views on concerns
raised about whether local competition will ever broadly develop for
business and residential customers, despite the best efforts of the
Congress? While many large companies are currently interested in
entry, is it clear, in your opinion, that robust local competition will
ultimately be achieved?

Mr. Young.

Mr. Young. Yes; Mr. Chairman, I do believe there will be sub-
stantial local competition. A lot, of course, along the way will de-
pend on what regulators do. If I could point to something Mr. Ellis
said a few minutes ago, I think there are a number of provisions
of the FCC's section 251 interconnection order that — ^because they
are going to require companies like mine to provide network ele-
ments at below cost, I think those will actually interfere with the
development of competition. But if I can for the moment assume
away what I consider errors by regulators, yes; I think we will see
significant local exchange competition.

Senator Thurmond. Mr. Ellis.

Mr. Ellis. Yes; I agree with that. I believe that what the Con-
gress put in place will work if the FCC construes it in a correct
way. I think that, unquestionably, the intent of Congress was to
open both the local exchange that had previously been a regulated
monopoly to full competition — they set in place the vehicles to do
it — and at the same time they put a pathway for the regional Bell
companies to get into long distance. They put great incentives on
our part to cooperate, to make it happen, and I believe that ulti-
mately it will work if the FCC implements the act as it was written
by Congress.

Senator Thurmond. Mr. Ebbers.

Mr. Ebbers. I think that all depends, Mr. Chairman, on whether
the Bell operating companies will get out of the courts and decide

to start complying with the interconnection order issued by the
FCC and get on with the business of the day rather than the legal
issues of the day.

Senator Thurmond. As I indicated in my opening statement, I
am interested in hearing views about how competition in local and
long distance services may develop over the next few years, and
particularly your estimates of the number of likely competitors
with substantial shares of those markets. Would each of you care
to comment?

Mr. Young. Well, I will start, Mr. Chairman. It is going to vary
substantially geography by geography. If you take the New York
market today, you have about 20 significant competitors who are
either certified or in the process of becoming certified and actually
building facilities. In northern New Jersey, you have about the
same number. We have significant numbers, and I would be happy
to provide them for the record, if you would like, Mr. Chairman,
in Philadelphia, in Pittsburgh, in Washington, DC, and Baltimore.

As a matter of fact, today as we speak we are providing to Mr.
Ebbers unbundled elements, as the act requires, in many respects;
unbundled loops, for example, in Baltimore. How many there will
be in any particular market — my crystal ball gets foggy a little way
out, but I think it is pretty clear there will be a substantial number
of people competing.

Mr. Ellis. I agree with that. Senator, but I would like to com-
ment on something Mr. Ebbers has suggested or implied twice, and
that is that the regional Bell companies would not implement, or
we are dragging our feet or would not provide compliance with the
law. I would say on behalf of SBC that I have been general counsel
for this company for 8 years and in that time, to my recollection,
we have never had a finding by a regulatory body or a court that
we have in any way refused to interconnect, degraded service, or
in any way conducted ourselves that would justify a question about
our fitness to hold licenses.

We go before the FCC, we go before the States. We are subject
to massive regulation of every type and, to my knowledge, there
has never been a single situation, at least in the last 8 years, in
which there has been a question of whether we would be in compli-
ance with an FCC order or a congressional order. It is not in our
interest to do so. We have provided interconnection arrangements
for over 20 years to long distance competitors. We have provided
them to cellular competitors, we have provided them to CAP's. We
have a record that I am proud of.

We receive laudatory comments on the quality of our inter-
connections, and I think it has no place to suggest that we would
do anything other than comply with the law. We disagree with the
FCC's order, but as we sit here we are vigorously complying with
that order, and will. As much as we think it is wrong and as much
as we are going to take and pursue our remedies in the courts, we
are going to comply with it as long as it is the law of the land.

Mr. Young. Mr. Chairman, if I could add just briefly, because I
know time is short, I would like to underline the last

Mr. Ebbers. Mr. Chairman, it is my turn to speak, isn't it, sir?

Mr. Young. I just wanted to say we agree. The FCC order is cur-
rently the law of the land. We have to comply with it. We are chal-
lenging it, but we are complying with it. My apologies.

Senator Thurmond. Mr. Ebbers.

Mr. Ebbers. Mr. Chairman, the issue is one of economics, how
many competitors there will be in the local market, and at a 17-
to 25-percent discount for reselling bundled services, there will be
very little competition in the local market because the cost of sell-
ing those services — the overhead costs of selling those services do
not provide enough margin to effectively get into that market, un-
less you want to do it as a loss leader, and most of the time it is
going to be very difficult to sustain a loss leader philosophy.

If the FCC order is put into effect and we put in our own switch-
es, that then allows us up to a 40-percent margin. It is also a fact
that that margin will yield, because of the increased cost of provid-
ing the services — some of the orders that we have to fill out are
manual orders that are 16 pages long to get local service, and if
we have to do that, then our overhead costs will increase substan-
tially and there will be minimal competition on that basis. The rea-
son for our merger with MFS is that we feel the only vehicle for
us to compete profitably in the local service market is to build our
own facilities.

Senator Thurmond. Mr. Young or Mr. Ellis, if the modification
of final judgment did not prohibit consolidation of Bell companies
in the past, why did your companies not seek to merge sooner in
order to capture the hundreds of millions of dollars of efficiencies
that you believe will result from your pending mergers?

Mr. Ellis. Well, Senator, our answer is very straightforward. We
were concerned that we wanted to see what the legislation was
going to be. As you may recall, for, I guess, the last two sessions,
there were any number of different bills that came out and it was
important to us to have some idea what the future would hold,
what it would look like.

Mr. Young. Mr. Chairman, I think Mr. Ellis is right. The legisla-
tion accelerates the head-to-head competition with giants like
AT&T, British Telecom-MCI, Sprint and its European partners,
and it really accelerates the need for us to take a market response.

Senator Thurmond. I believe my time is up.

Senator Leahy.

Senator Leahy. Thank you, Mr. Chairman. I have had, as we all
have, to go back and forth to votes, but I understand in earlier tes-
timony, Mr. Young, you had responded to some of the things that
I had said, and we will go into that in just a moment.

Mr. Young. Yes.

Senator Leahy. And, Mr. Ellis, correct me if I am wrong on this.
You testified that SBC and PacTel never had any intention to com-
pete with each other. Is that correct?

Mr. Ellis. That is correct, sir.

Senator Leahy. And I have heard the same thing about Bell At-
lantic and NYNEX.

Mr. Young. That is correct.

Senator Leahy. In fact, in testimony that Bell Atlantic filed be-
fore the Vermont Public Service Board last Friday, it said that not
only did the company have no plans to compete in Vermont as a

local exchange carrier, but it had no intention to compete any^vhere
in the NYNEX region. Bell Atlantic, as I understand it, said New
York City was perceived as already too competitive.

Well, let's assume that New York City is too competitive, wheth-
er it is or not. Then why did Bell Atlantic decide not to look at
places such as Vermont, where most agree that such intense com-
petition does not exist?

Mr. Young. Mr. Senator, in looking at new markets to enter —
I am at a risk of maybe repeating a little bit of what I had in my
testimony.

Senator Leahy. I understand. You just have to bear with me. I
am new and young at this, but I will do my best to keep up with
you, Mr. Young.

Mr. Young. I appreciate that. When we look at a market for
entry, we do what any business would naturally do. We look to see
do we have some advantage; is there a reason for us to think that
this is a place where we could do pretty well. When you are a tele-
communications company, the factors that you look at are things
like do you have significant brand recognition there; do customers
know who you are; are you going to have to spend a lot of money
just for people to get to know who you are.

Senator Leahy. Did you feel that in Vermont people wouldn't
know who Bell Atlantic was?

Mr. Young. Compared to AT&T and MCI and Sprint, no. We
think our brand recognition is substantially lower. You also look at
things like do I have

Senator Leahy. We even get newspapers up there, you know. We
are out in the back woods, but we do know

Mr. Young. Senator, I grew up in the country, too, so I appre-
ciate that. But you also look at other factors like do you have facili-
ties there; do you already have customer contacts and business re-
lationships with significant customers. And when you look at a
market like Vermont, we don't, and so that is why — when we look
at a decision like that, that is the reasoning behind it.

Senator Leahy. But intense competition was not one of the rea-
sons, then?

Mr. Young. Well, I will take your word for what the filing said
and all I can say is

Senator LEAHY. No; I am not saying what the filing said. Would
intense competition not be a reason?

Mr. Young. Well, certainly, if I thought there was a good market
and I could be the first one in, sure, I am going to be more anxious
to get into that market than if I think there is a market with three
people or four people or seven people are already in there providing
service. I think that is only logical.

Senator LEAHY. Wouldn't everybody?

Mr. Young. I think so.

Senator Leahy. If you could have the monopoly, you would rath-
er be there.

Mr. Young. I am not talking about monopoly. I am talking about
maybe being the first one in to compete with the monopolist.

Senator Leahy. Well, we are going to have more monopolies to
compete with as we go along, it appears to me, but let me ask this.
The Telecommunications Act was expected to create this environ-

ment in which companies would compete in each other's markets.
Now, I am told that a number of long distance companies and local
access providers have filed for interconnection to the local phone
networks of incumbent Bell companies in order to bring some kind
of competition in the local loop. The Bell companies, of course, can
do the same thing, but they haven't.

Now, Mr. Ebbers, as I read your written testimony, you point out
the irony that despite their expertise in providing local phone serv-
ice, quote, "not one of the Bells' applications to offer service in an
out-of-region State requests certification as a local carrier." Am I
being fair?

Mr. Ebbers. That is fair, sure.

Senator Leahy. Is it correct that no Bell company has filed for
interconnections with a local carrier outside of their own service
territory?

Mr. Ellis. That is not correct. Senator.

Senator Leahy. It is not?

Mr. Ellis. Southwestern Bell, SBC Communications, has filed in
Illinois and New York.

Mr. Ebbers. They really filed for long distance and you don't
have to file a separate filing for local, so it kind of goes automati-
cally in those two States.

Mr. Ellis. That is not correct, Senator. We have filed to obtain
a certificate to provide local exchange telephone service in Illinois
and New York.

Senator Leahy. Both of you gentlemen will — at some point, the
staff will be provided with your testimony, but if you want to add
to that or add anything to me on it, feel free.

When was this, Mr. Ellis?

Mr. Ellis. It was shortly before — and the record will be what it
is, but I believe it was before the legislation was passed.

Senator Leahy. And that is the only one?

Mr. Ellis. Those are the two, Senator. I am not sure if you were
here, but I said our plan, our practice, has been to file where we
have network facihties, to compete where we have network facili-
ties, where we have a brand name — Cellular One in Chicago, Cel-
lular One right here in Washington, DC — where we have cus-
tomers. That is the strategic plan that has been SBC's for a long
time. Several years ago, the Department of Justice interviewed, de-
posed, our people in connection with the motion to vacate. That
was the testimony then and we have acted on that plan.

Senator Leahy. Will we see more Bell companies trying to ex-
pand local service under the Telecommunications Act, if you had to
predict, Mr. Young?

Mr. Young. Well, let me say this. One, I think that you come
back to the criteria that both Mr. Ellis and I have been talking
about. If a local exchange carrier or any other carrier has a logical
platform in any particular local service area that allows them to
enter — if they have facilities, if they already have customers there,
if they have significant brand recognition — if they have several of
those elements, yes, I think you will see that. If they don't have
those elements, then I think it is a tough thing to do.

Senator Leahy. Would you agree with that, Mr. Ellis?

Mr. Ellis. Well, I would say, Senator, that we have got a lot to
deal with. As I mentioned, we have 115 requests for competitors to
come in and provide local exchange in our 5 telephone States, and
approximately 100 in California, and they are the biggies as well
as the small ones. So I think we will look, in accordance with our
strategic plan, at each situation. Will we come to Washington? I
don't know, and I don't know the timetables.

Senator Leahy. So you say it will be a case-by-case situation?

Mr. Ellis. Within the criteria I said. One other thing. Senator,
I would like to point out. The problem that Mr. Ebbers and others
have talked about in terms of competing for local exchange is, in
part, a product of the fact that historically local telephone rates
have been kept very low. In Texas, for example, the State regu-
lators have decided that the Texas telephone rate for 24-hour-a-day
service is less than $10. Now, we didn't choose that. That was im-
posed; that was the Texas regulatory policy decision. I wish they
could be closer to cost, but that is what it is. So I can understand
anybody coming in and saying, whether you have 20-percent dis-
count off of $10 or what you have, that that is a problem. But it
is not a problem that is a result of something SBC Communications
did.

Senator Leahy. If I was at all parochial, I would say you have
got to have some advantage to live in Texas, but I am not going
to say that. [Laughter.]

Mr. Ebbers, did you want to add anything to this?

Mr. Ebbers. No; Senator, I don't want

Senator LEAHY. I take your point, Mr. Ellis. I don't mean to be
flippant on that.

Mr. Ebbers. I think Mr. Young and Mr. Ellis have clearly articu-
lated the reason why we won't have effective local competition,
RBOC in RBOC region. They come to it from a monopolistic atti-
tude. You have to have a customer base already. They are not will-
ing to go out and compete for one. You have to have facilities al-
ready. They are not willing to go out and build them. They have
to have name recognition already. They are not willing to go out
and build name recognition. For our purposes, we are perfectly
happy to start from the ground and work our way up.

Senator LEAHY. Let me ask something in the long distance area,
and to bring it back home. The Vermont Public Service Department
issued a draft telecommunications plan for the State a few weeks
ago and it said, quote, "Opportunities for combined long distance
revenues appear to be the driving force behind," and it goes on to
say "the NYNEX-Bell Atlantic merger." This somewhat puzzles me
because the Telecommunications Act permits a Bell company to get
into the long distance market in its own region only when it meets
the interconnection and unbundling checklist, but the companies
are free to go into the long distance market outside their own re-
gion.

Now, when you merge the companies and you dramatically in-
crease the size of your region, it strikes me that you are, in fact
delaying your own ability to offer some kind of long distance in
your own regions? In other words, if Bell Atlantic didn't merge with
NYNEX, it could begin offering long distance service in the NYNEX

area, or vice versa. But when they combine, then you have got to
go through all these other hoops.

Will the mergers, in fact, delay your entering the long distance
market in the new combined regions?

Mr. Young. Well, Senator, I think maybe another way of charac-
terizing what you have just said is that because the merger in-
creases our in-region footprint, what it does is increase our incen-
tive to meet the checklist, to comply with the unbundling require-
ments of the statute, because now the long distance carrot that we
get by meeting all those requirements got bigger.

Senator Leahy. So you are sajdng the mergers won't delay your
entering the long distance market in the new combined regions?

Mr. Young. Well, I think what they do is provide an even great-
er incentive for us to meet the checklist, and we are very hopeful
that we are going to be able to meet the checklist, market by mar-
ket, promptly so that we can start providing some real price com-
petition for the ordinary consumer that AT&T, MCI, and Sprint are
not doing today.

Senator Leahy. Is it your professional judgment that you are
more apt to be into that market with a merger than you would
have been otherwise?

Mr. Young. Senator, my judgment is that I think we will prob-
ably into the long distance market area by area on about the same
schedule as we would have without the merger.

Senator LEAHY. Do either of you gentlemen want to add to that?

Mr. Ellis. No, sir.

Senator Leahy. Mr. Ebbers.

Mr. Ebbers. No, sir.

Senator Leahy. Mr. Chairman, if I might just ask one last ques-
tion on this, do the mergers help Bell Atlantic and NYNEX, PacTel,
SBC, better compete in the long distance market? I mean, Mr.
Young, you seem to think they would.

Mr. Young. Yes. Let me take that. Yes, I think they will help
us compete in the long distance market. One of the reasons I say
that is that an enormous cost of doing business in this industry is
the cost of the equipment. Now, one of the things that you find out
very quickly in this business is that if you want to get equipment
at good prices, volume is everything. The bigger the volume, the
better the price you get. That is true of cutting-edge, high-tech-
nology equipment, like the equipment that we are going to be in-
stalling in our networks so that we can provide video, for example.
But it is true of other equipment as well.

So I think, for that reason alone, the equipment savings, yes, this
does help us in the long distance market, but it helps us in a num-
ber of other areas as well — development of systems, development of
other technology that we will need to be in the business. The econo-
mies of scale and scope do make a difference, yes.

Mr. Ellis. I would just add to that to say that one of the reasons
that we found the merger attractive with Pacific Telesis is they
have a very strong, excellent cost performance shop. We believe we
have an equally strong revenue-generating, marketing, product de-
velopment shop. We put those two together and we think we have
a very strong company that can go into — and I am sorry; before,
I said we weren't in the long distance business. We are not in the

long distance business that we can't be in, the interLATA long dis-
tance business.

So we are going to start from zero, and we think that combina-
tion will make for a strong competitor, along with the other mat-
ters of scale that Mr. Young has talked about. I would again stress
we are starting at zero, going into that long distance market.

Senator Leahy. Well, Mr. Chairman, I know you want to move
on and we are going to have other votes, and I will submit, if I
might, my other questions for the record. I do have a number of
other questions, but I will submit them for the record.

Senator Thurmond. Thank you.

[The questions of Senator Leahy are located in the appendix.]

Senator Thurmond. Before we move to the next panel, Senator
Feingold, I believe you had a question.

Senator Feingold. Mr. Chairman, I appreciate it very much, and
I regret that I can't be here for the second panel, so I hope Mr. At-
kinson, who is going to testify on the panel, doesn't mind if I just
read a brief comment that he makes in his testimony and I would
like Mr. Young's and Mr. Ellis' reaction.

He attaches an illustrative list of minimum standards to be at-
tached to any merger approval that TCG believes to be reasonable
and appropriate. He says, "How could a company of good intention
object to this proposal? If the big Bell or any BOC, for that matter,
intends to live up to the requirements of the Telecommunications
Act, it should have no difficulty in committing to strict performance
standards."

So with regard to this comment, TCG suggests that it should be
easy to agree to minimum performance standards if the BOCs
aren't anticipating service problems during the transition period.
How do you gentlemen respond to that?

Mr. Young. Senator, since I don't have the specific suggestion in
front of me, it is a little hard to comment, but I don't want to hide
behind that.

Senator Feingold. Well, let me be fair to you. It has to do with
keeping the local exchange competition whole relative to the level
of performance and service that existed before the merger.

Mr. Young. Well, on that issue, we have a number of inter-
connection agreements that we have been able to enter into, and
the issue of service performance and accountability and liability in
the event that our service performance doesn't meet particular lev-
els — at least so far, with at least some providers, we have been able
to negotiate mutually acceptable agreements. So at least in the
past, this hasn't been a problem.

Now, I will tell you based on my exposure to this that, you know,
some parties have been demanding service levels and liability lev-
els that we think are just completely out of market. But when peo-
ple have come in with reasonable requests, it has been very easy
for us to split the difference and reach an agreement.

Senator FEINGOLD. So this could well, in the proper context, be
a reasonable proposal?

Mr. Young. It can, and I think it is most effectively dealt with
in the structure that Congress has set up, negotiations between the
parties with the oversight of the State regulators.

Senator Feingold. Mr. Ellis.

Mr. Ellis. Well, I would just add to that. We have 17 inter-
connection agreements, and they are negotiated one by one and
they are private negotiations under the auspices of the States. In
some of those agreements, the parties have negotiated both stand-
ards of performance and even liquidated damages.

But on this point, I will go back to what I said before. We, for
many years, have looked at the whole area of interconnection, par-
ticularly with the number of customers — and that is what I will
call them, carriers — that we have. We have performance standards,
we have capabilities. They can come in and online monitor the
quality of the access. This is an area we get rated by the FCC.
They rate us, all the carriers.

At predivestiture, pre- 1984, there could have been arguments,
but this has not been, I submit, in the relatively — well, I will use
8 years — this has not been an area of controversy.

Senator Feingold. Is this the kind of thing you would agree to,
then, as a condition for merger?

Mr. Ellis. It is absolutely not the kind of thing we would agree
to as a condition for merger. We believe, unquestionably, this merg-
er should be held to the same standard that the AT&T-McCaw
merger was, that the MCI-BT, that the Sprint — I could go down
the whole list, Disney, and so on — the law ought to be the same
for everyone. What I am saying is under the act that was passed
by Congress, that is a matter for private negotiations and it has
worked. We have had 17 agreements with big and small, including
people like Time Warner and MFS. So I am saying the process was
working. The problem has come up because of FCC has gone off
and tried to reregulate the system with a 700-page, single-spaced
order. That is the problem.

Senator Feingold. Mr. Chairman, we will pursue this again an-
other time and I thank you very much for the extra time.

Senator THURMOND. Thank you, gentlemen, for your appearance.

We will now have the second panel come around — Mr. Michael
Salsbury, Mr. William Barr, and Mr. Robert Atkinson. We will give
each of you 5 minutes to make an opening statement, and please
confine it to 5 minutes. You can put your entire statement in the
record.

Mr. Salsbury, you may start.

PANEL CONSISTING OF MICHAEL H. SALSBURY, EXECUTIVE
VICE PRESIDENT AND GENERAL COUNSEL, MCI COMMU-
NICATIONS CORP., WASHINGTON, DC; WILLIAM P. BARR,
SENIOR VICE PRESIDENT AND GENERAL COUNSEL, GTE
CORP., STAMFORD, CT; AND ROBERT C. ATKINSON, SENIOR
VICE PRESIDENT, LEGAL, REGULATORY AND EXTERNAL AF-
FAIRS, TELEPORT COMMUNICATIONS GROUP, INC., STATEN
ISLAND, NY

STATEMENT OF MICHAEL H. SALSBURY

Mr. Salsbury. Thank you, Mr. Chairman and members of the
committee. My name is Michael Salsbury and I am executive vice
president and general counsel of MCI Communications Corp. It is
a privilege to testify before this committee today, and permit me
at the outset, Mr. Chairman, to acknowledge the exemplary leader-

ship of members of this committee to ensure that the act recog-
nized the critically important role of the Department of Justice in
protecting and promoting competition in telecommunications mar-
kets.

Development of competition in the long distance industry since
the breakup of the Bell System in 1984 pursuant to the MFJ is an
extraordinary American success story. The changes spurred on by
DOJ and the FCC gave American consumers and businesses mul-
tiple choices for long distance telephone service. Both large and
small entrepreneurial companies now compete vigorously in the
long distance industry.

The long distance cartel referred to by Mr. Young at this point
has more than 500 members, has so far escaped detection by Fed-
eral and State competition authorities, and to date has been visible
only to local exchange monopolists and their paid experts. Since
1984, long distance prices have declined almost 70 percent. Innova-
tive long distance services, such as virtual networks, fax, and the
Internet, have been introduced. Call quality has increased and cus-
tomer service has improved dramatically.

Unfortunately, the MFJ did not address competition in local tele-
phone service markets. These markets remain monopolies domi-
nated by the seven RBOC's and GTE, which provide more than 99
percent of all the local telephone services in their service terri-
tories. Compared to the 42 million times customers changed their
long distance carriers last year, no more than a handful of cus-
tomers could obtain local service from more than one carrier.

Against this background, the intent of the act was, first, to pry
open local telephone markets to competition and to reform and ad-
vance universal service arrangements so as to eliminate the cur-
rent massive subsidy flows; and, second, once local markets were
opened and effectively competitive, to promote further diversity and
choice in long distance by permitting the RBOC's to enter the long
distance market within their regions.

For the act's goals, two things are critically important. First,
Federal and State regulators must implement the act in a manner
consistent with Congress' procompetition intent. The FCC is off to
the right start with its interconnection order issued last month.
Yet, much of the implementation effort lies ahead. Because not one
of the RBOC's or GTE has entered into a single interconnection
agreement that meets the requirements of the act and the FCC's
rule, the act now requires each State separately to outline those
agreements in lengthy arbitration proceedings. This process will,
no doubt, be further complicated by the appeals from the inter-
connection order filed by each of the RBOC's and GTE.

The second critical factor is DOJ's continuing role in ensuring
that the evolution to competition in local markets does not jeopard-
ize long distance competition either by premature entry of the
RBOC's into the long distance market while they still remain mo-
nopoly power or by combination of RBOC monopolies that can
delay and possibly frustrate development of local competition en-
tirely.

We have met with representatives of the Antitrust Division and
can report that they are preparing to carry out their statutory re-
sponsibilities in reviewing the RBOC applications for long distance

entry. The proposed mergers of Bell Atlantic and NYNEX and of
SBC and Pacific Telesis, however, are very troubling and should be
opposed. If permitted to proceed, these mergers would impede the
development of local competition in each of these RBOC's regions
and would create a substantial likelihood that the resulting mega-
RBOC's would leverage their local monopolies to gain market
power in the long distance market.

Although local telephone service remains a highly concentrated
market, in no instance have RBOC's ever competed with each other
in the provision of regular telephone service. In fairness, in the
past State laws have often prevented that, but the act eliminated
all such legal constraints. With the prospect of increased revenues
and profits from the out-of-region business of their customers
alone, one would expect to see demands for interconnection from
other RBOC's and the beginnings of RBOC competition. After all,
who better to compete in local service markets than the experi-
enced, well-financed companies that have been doing it for 100
years?

Why, for example, wouldn't Bell Atlantic, which provides residen-
tial service to many New York executives, not try to win the tele-
phone service of their businesses away from NYNEX? If Bell Atlan-
tic wasn't interested in New York and SBC wasn't interested in the
business in California, why are they buying these companies? This
is, in fact, the justification Bell Atlantic gave some years ago when
it tried to merge with TCI. At that time, Bell Atlantic's economists
said that the only possible purpose and consequence of the merger
would be to mount a direct competitive challenge across the board
to the incumbent telephone companies, predominantly other BOC's.
They are not saying that now. Why not?

I just might quickly conclude. The reason is that if they go into
the other territories and demand interconnection, the other — if Bell
Atlantic went into NYNEX' territory or if Southwestern Bell went
into Pacific's, then the other companies would retaliate. They
would demand interconnection from the other company and they
would immediately start competing against each other, bringing
local competition that much quicker. The answer to the monopo-
lists' dilemma, Mr. Chairman, was to merge, not compete.

Thank you.

[The prepared statement of Mr. Salsbury follows:]

Prepared Statement of Michael H. Salsbury
executive summary

It is a privilege to testify before the Committee on the state of competition in the
telecommunications industry following enactment of the Telecommunications Act of
1996. I'd like to acknowledge the exemplary leadership of members of this Commit-
tee to ensure that the new law recognized the critically important role of the De-
partment of Justice (DOJ) in protecting the promoting competition in the tele-
communications marketplace.

MCI is uniquely situated to speak about competition in the industry because more
than 25 years ago we successfully challenged the Bell System monopoly and brought
competition to the long distance industry. We have experienced first-hand the anti-
competitive shenanigans that an incumbent monopoly can engage in to frustrate
new entrants that are trying to interconnect with its network and compete for cus-
tomers. We know why it so necessary not only to have fair rules of the game but
why you need the referees on the field for enforcement.

The Act holds the potential to spur the same kind of consumer benefits in the mo-
nopoly local market that long distance competition brought. Today, consumers have

many choices in long distance providers and rates have fallen nearly 70 percent over
the last decade — the same long distance call that cost $1.77 (in 1994 dollars) ten
years ago, would cost less than 58 cents today. The same is not true in the local
telephone market dominated by the seven Regional Bell Operating Companies
(RBOC's) and GTE. Their monopoly power and their ability to act anticompetitively
is why the new rules of the game and the enforcement mechanisms are critical to
realizing the goal of full competition in every telecommunications market. My testi-
mony focuses principally on two areas of concern — the implementation of the Act
and how the proposed RBOC mergers will harm competition.

Seven months after the passage of the Act, little in the local marketplace has
changed. Consumers only have one choice for their local service provider. The in-
cumbent monopolies, while crying that they are facing competition, are doing every-
thing possible to thwart new entrants and kill its development. Within a month of
the Federal Communications Commission's (FCC) issuance of new local competition
rules, the incumbent monopolies have begun an enormous legal battle seeking to
block the implementation of the Act. The monopolists' tactics of stall, disrupt and
delay are exactly why we must have fair rules and good enforcement of the rules
and playing conditions. In the near term, regulation must play its role as a sub-
stitute for competitive processes until true local competition — and market forces —
fully develop.

The FCC is off to a good start in issuing its August 1 local competition rules, but
these rules are only one part of a three part trilogy of necessary reforms. The trilogy
must include:

National Local Competition Rules — ^Adoption of national rules to foster local com-
petition throughout the U.S.

Universal Service Reform — A competitively-neutral universal service plan that in-
creases the number of Americans on the network, provides access to basic and ad-
vanced services, eliminates hidden subsidies, ensiu-es that all players contribute in
an equitable manner and ensures that local service remains affordable in all areas
of the country.

Access Charge Reform — Reform of access charges which currently result in long
distance companies paying nearly half of every dollar to incumbent local monopolies.
These charges are seven times the cost of providing access. Competition will not de-
velop unless these charges reflect the true price of providing access to the incum-
bent's network.

As noted, the Act recognizes DOJ's preeminent role in safeguarding national pro-
competition policies. In this regard, DOJ must critically examine the proposed merg-
ers of Bell Alantic/NYNEX and SBC/PacTel. MIC views these proposed mergers as
inconsistent with the pro-competition intent of the Act and in violation of our na-
tional antitrust principles. These mergers should be opposed. If these RBOC merg-
ers were allowed, our nation would lose two powerful and resourceful competitors,
both of which would likely be new entrants into the local markets now being served
on a monopoly basis by their merger partners. Bell Atlantic-NYNEX would control
25 percent of the nation's access lines to customers and SBC-PacTel would control
21 percent. In other words, two huge monopolies would have bottleneck control of
more than 45 percent of the nation's phone lines. These combined "mega-RBOC's"
would also have a much greater ability to engage in anticompetitive activity if al-
lowed to provide interLATA long distance service in their huge new intraregion
markets because of the large proportion of calls on which they control both ends of
access (i.e., calls that both originate and terminate within the new larger regions).

Assuming that the efforts of incumbent monopolists to thwart it fail, the develop-
ment of local competition promised by the Act, one properly implemented, can
produce the same kinds of consumer benefits that competition in the long distance
market produced following the break-up of the Bell System — and more.

Mr. Chairman, actions taken by the FCC and DOJ in the coming months will in
large part determine whether or not the Act's competitive goals — and the benefits
to consumers that competition brings — are realized. To date, we have seen the
RBOC's going to court, refusing to sign interconnection deals that meet the Act's
competitive checklist, and doing all in their power not only to retain, but in the case
of these proposed mergers, to expand their monopolies. I commend you for your dili-
gence in publicly examining issues and I appreciate this opportunity to appear be-
fore the committee.

Good morning, Mr. Chairman and members of the Committee. My name is Mi-
chael H. Salsbury. I am Executive Vice President and General Counsel of MCI Com-
munications Corporation. It is a privilege to testify before this Committee on the

state of competition in the telecommunications industry following enactment of the
Telecommunications Act of 1996 (Act).

Permit me at the outset, Mr. Chairman, to acknowledge the exemplary leadership
of members of this Committee to ensure that the new law recognizes the critically
important role of the Department of Justice (DOJ) in protecting and promoting com-
petition in the telecommunications marketplace.

No one can question MCI's long-standing commitment to achieving full and fair
competition in all telecommunications markets. MCI was the pioneer of competition
in the telecommunications industry — first in long distance and now in local tele-
phone markets. MCI has grown from a tiny upstart challenging the Bell System to
an industry leader. In the process, MCI has become a diversified communications
company offering consumers and businesses a range of services including long dis-
tance, wireless, local access, paging, Internet access, and more. MCI will continue
to provide the innovative services oiu- customers demand, including local telephone
service, but can do so only if the Act is properly implemented and if regulators pre-
vent anticompetitive behavior on the part of incumbent monopolies. In order to be-
come a facilities-based competitor to the incumbent telephone monopolies, MCI cre-
ated a subsidiary, MCImetro. If the right rules are in place and arbitrations with
the Regional Bell Operating Companies (RBOCs) are successful, by early next year,
MCImetro will have grown to operating local switches in 24 markets in 20 states.

INTRODUCTION

For decades, the telecommunications industry was dominated by the former Bell
System monopoly. Twelve years after the break-up of the Bell System, long distance
is a highly competitive market with hundreds of competitors and prices that have
decreased nearly 70 percent. The local telephone markets, however remain monopo-
hes dominated by the seven RBOCs and GTE. The Act holds enormous potential for
bringing competition to these monopoly markets, and while MCI is optimistic that
this historic legislation will achieve that goal, it is far from a foregone conclusion.
Several critical events must occur before that will even be possible. My testimony
will focus principally on two areas that require special attention: implementation of
the Act (a "trilogy" of key regulatory decisions) and the proposed RBOC mergers.

First, the Act must be properly implemented by both federal and state regulators
in a way that is consistent with Congress' pro-competition intent. While the Federal
Communications Commission (FCC) if off to the right start with the August 1 re-
lease of its local competition rules, much of the Act's implementation lies ahead. Not
a single state has arbitrated an interconnection agreement pursuant to Section 252
of the Act. Moreover, FCC decisions in two key proceedings — universal service and
access charge reform — are still months away. These two items, together with suc-
cessful implementation of local competition rules, form what the FCC has labeled
a "trilogy" of key decisions needed to launch local competition and preserve long dis-
tance competition. If successfiilly executed, this trilogy promises to bring lower
prices and innovative telecommunications services to all Americans.

Second, certain pending industry mergers will harm competition and impede
achievement of the Act's goals. The Act opens to competition a $500 billion commu-
nications and information market with exploding growth potential. Many players in
this market, including MCI, have and will form alliances to offer innovative new
products and services and increased geographical reach. We do not assert that such
economic activity should be discouraged. To the contrary, joint ventures and merg-
ers may strengthen competition in the market. Not all mergers, have such beneficial
results.

MCI views the proposed mergers of Bell Atlantic with NYNEX and SBC Commu-
nications (SBC) with Pacific Telesis (PacTel) as inconsistent with the pro-competi-
tion intent of the Act and in violation of our national antitrust principles. These
mergers should be opposed. If these RBOC mergers were allowed, our nation would
lose two powerful and resourceful competitors, both of which would likely be new
entrants into the local markets now being served on a monopoly basis by their
merger partners. Bell Atlantic-NYNEX would control 25 percent of the nation's ac-
cess lines to customers and SBC-PACTel would control 21 percent. In other words,
two huge monopolies would have bottleneck control of more than 45 percent of the
nation's phone lines. These combined "mega-RBOCs" would also have a much great-
er ability to engage in anticompetitive activity if allowed to provide interLATA long
distance service in their huge new intraregion market because of the large propor-
tion of calls on which they control both ends of access (i.e., calls that both originate
and terminate within the new larger regions).

Assuming that the efforts of incumbent monopolists to thwart it fail, the develop-
ment of local competition promised by the Act, once properly implemented, can

produce the same kinds of consumer benefits that competition in the long distance
market produced following the break-up of the Bell System — and more.

LONG DISTANCE COMPETITION BENEFITS THE ECONOMY & CONSUMERS

Mr. Chairman, the development of competition in the long distance industry since
the break-up of the Bell System is an extraordinary American success story. The
changes spurred on by the DOJ and the FCC gave American consumers and busi-
nesses multiple options for long distance telephone service. Both large and small en-
trepreneurial companies now compete vigorously in the long distance industry. *

The development of a highly competitive long distance industry has been a boon
for the U.S. consumer. A 1995 study ^ by Dr. Robert Hall of Stanford University con-
firmed what the world already knew — that long distance competition created hun-
dreds of new businesses as new carriers entered the market, stimulated an unprece-
dented surge in technological innovation, and caused call quality to soar as long dis-
tance companies criss-crossed the nation with fiber optic networks that today com-
prise the Information Superhighway. In addition, and perhaps most importantly,
competition drove real long distance prices to American consumers down by almost
70 percent between 1985 and 1995. The same long distance call that cost $1.77 (in
1994 dollars) ten years ago, costs less than 58 cents today.

Notwithstanding the facts, the RBOCs argue that the long distance industry is
not competitive.^ This view appears to be motivated more by a desire to influence
public policy than by a reasoned and impartial evaluation of the facts; it is notori-
ously wrong. Since 1995, while the RBOCs were spreading their propaganda to pol-
icy makers, many on Wall Street realized that the firms in the long distance indus-
try were vigorously fighting for market share through price competition, quality im-
provements, and new and innovative service offerings.

FCC figvu-es also demonstrate vigorous long distance industry competition. AT&T
market share measured by revenue slipped almost one percentage point in the first
quarter of 1996 to 55.1 percent, continuing the downward trend from 90 percent at
divestiture in 1984; 67 percent in 1989; and 61 percent in 1993. Measured by traffic
revenue, AT&T's share is now approaching 50 percent.

Change in market share, however, does not teU the whole story. Market share re-
flects only net customer turnover; if AT&T loses a customer to one long distance
competitor but wins one from another, its market share remains the same. The ac-
tual turnover is a more accurate barometer of competition and it demonstrates ex-
treme rivarly — long distance customers changed carriers over 42 milHon times in
1995, with a faster pace of turnover exhibited in the first quarter of 1996. In addi-
tion, smaller carriers continue to gain an increased share of the market. The FCC
reports that "third tier" carriers have increased their share of the market revenue
fivefold, from less than three percent in 1984 to more than 14 percent in 1995. The
ability of new entrants to rapidly build market share is reflective of an open and
competitive, rather than a non-competitive, market.

In addition to presenting misleading facts on market share in the long distance
industry, the MacAvoy study's core conclusions are based on an analysis of long dis-
tance prices and costs that is totally flawed. According to the study, long distance
prices are well above costs and the margin has been increasing over time. The two
mndamental problems with the analysis are its pricing and cost data. There are sev-
eral problems with the pricing analysis. First, it overstates consumer rates by ignor-
ing important residential discount plans — such as the MCI "Sure-Savings," the
AT&T "True Savings," and other discount plans. Second, it makes incorrect calling
pattern assumptions.

It assumes that 85 percent of residential calls are made during the day, which
is flatly incorrect and causes a gross overstatement of average residential prices.
Third, it overstates business rated by ignoring business contract tariffs. Incredibly,
the cost data leaves most of the costs incurred by long distance companies out of
the equation — that analysis excludes billing, promotion, advertising, and most net-

1 In Utah and South Carolina, 27 long distance companies provide customized service to con-
sumers and small businesses. In Texas, more than 100 companies offer a variety of long distance
services. More than 70 companies compete in Pennsylvania and Illinois. In California, Michigan,
Ohio, New York, Wisconsin, and Florida, more than 50 long distance companies are today offer-
ing service.

■^ Long Distance: Public Benefits from Increased Competition, 1995.

3 The RBOCs are promoting the findings of a book by a paid economic consultant (Paul W.
MacAvoy, The Failure of Antitrust and Regulation to Establish Competition in Markets for Long-
Distance Telephone Services (Cambridge, MA: The MIT & AEI Press, 1996)) which concludes
that the long distance companies have "stabilized" their market shares and have gotten so good
at "signaling' what their prices will be that competition is not effective at lowering prices. Un-
less and until, of course, the RBOCs gain entry into the long distance market.

work costs. With the data errors corrected, the conclusions reached are the opposite:
long distance prices have fallen dramatically over the last decade and that decline
has outstripped the decline in access charges by a wide margin.

LOCAL TELEPHONE MARKETS ARE STILL DOMINATED BY MONOPOLIES

In marked contrast to the vigorously competitive long distance industry, there
was no meaningful competition in local telephone markets when the Act was signed
into law in February. Until preempted by Section 253 of the Act, local competition
could not exist because most state prohibited competition by law or regulation. The
House Commerce Committee Report noted that "the seven BOCs control over 80
percent of the local telephone network," "the top 10 telephone companies control
over 92 percent of the local telephone network," and "in the large number of mar-
kets for local telephone service tnere was no instance where any of the top 10 tele-
phone companies compete with one another.""* Although a key objective of the Act
is to bring full and open competition to the local market, little has changed in the
last seven months. The $95 billion local telephone market is still dominated by mo-
nopolies.

In any given geographic area, only one company provides the conectivity that al-
lows users to communicate wfith one another through the telephone. Anyone who
wants telephone service-local or long distance-has to rely on the local telephone
company to provide that conectivity. The RBOCs continue to monopolize both as-
pects of local telephone service in their serving areas: local exchange (calling friends
and family across town) and exchange access (connecting you to your long distance
phone conipany for long distance calls).

The RBOCs claim that they have been facing significant competition for exchange
access traffic. Long distance companies pay about 40 percent of every revenue dollar
for access. Approximately 99.4 percent of those dollars go to the local telephone mo-
nopolies. Industry-wide, long distance companies' payments to local monopolies last
year exceeded $20 billion. MCI's access payments alone exceeded $5 bilhon. Com-
pared to the billions of dollars paid to the RBOCs, MCI paid only $25 million — less
than four tenths of one percent — to competitive access providers, or competitive local
exchange carriers (CLECs). Competition in this market is far from a reality. More-
over, the RBOCs continue to experience growrth in their access traffic volumes. In
the last three years local telephone company access traffic has grown by more than
seven percent a year. Even in two states where the presence of CLECs would be
most likely to erode local telephone company access business — Illinois and New
York — interstate access traffic growth for Ameritech and NYNEX has been about
the same as the rest of the country.

The tiny pockets of emerging competition, which the RBOCs prefer to show
through a magnifying glass to overstate their importance, do not today provide con-
sumers with choices for local telephone service. Ironically, at the same time the in-
cumbent monopolies are crying "competition," they are doing everjdhing possible to
squelch its development.

Monopoly behavior stifles competition

The RBOCs and GTE are doing everything possible to stifle competition in court,
in the regulatory process, and in the marketplace. Barely a month has passed since
the FCC issued its new local competition rules and the incumbent monopoUes have
already initiated a legal battle against the implementation of the Act. GTE and
Southern New England Telephone (SNET) have sought to stay the effective date of
the FCC's local competition rules, arguing that they will be damaged if the rules
take effect. Last week, US WEST, Bell Atlantic. NYNEX, PacTel, and BellSouth pe-
titioned the U.S. Court of Appeals for the District of Columbia to overturn the FCC's
order, as did GTE. SBC filed a similar petition in the Court of Appeals for the Fifth
Circuit in New Orleans. Although MCI believes that the stay applications wall fail,
this is yet another example of the incumbent monopolies' attempt to impede the
competition process.

While the Act creates affirmative obligations on the part of the RBOCs to open
their markets to competition, the interconnection agreements that have been signed
between the RBOCs and their potential competitors are few and interim in nature
and with companies interested primarily only in terminating traffic over the
RBOCS' networks. Not one of the agreement addresses of all the local competition
issues that Congress mandated.

The fact is, of the forty or so interconnection agreements that have been nego-
tiated very few even address all fourteen items of the competitive checklist set forth

-«H. Rep No. 104-204, 104th Cong., 1st Sess., at p. 50 (emphasis added).

in Section 271 of the Act. Those that do fall short either in the pricing requirements
of the Act, or by requiring certain restrictions on resale or unbundled elements.'"'

MCI and other new entrants have been forced to sign limited interim agreements
to interconnect with the incumbent monopoly's network. Since these agreements are
deficient, key elements — such as pricing terms for resale of local service — must be
renegotiated. Because negotiations with the RBOCs have led nowhere, MCI and new
competitors are forced to go to arbitration. MCI has filed for arbitration in 28 states.
TCG, MFS and AT&T have all filed petitions requesting arbitration with the
RBOCs.

A competitive marketplace naturally works against such anti-competitive abuses.
When several vendors compete for MCI's business, they are responsive to our needs.
But when MCI and other competitors must still rely on the monopoly RBOCs to
reach our customers, bad things can happen. Consider these two examples:

Bad Faith Dilatory Tactics. — The RBOCs have used delaying tactics since passage
of the Act to stifle competition. In April, we sent each RBOC (and each state com-
mission) our Term Sheet, listing the items we needed from them in order to provide
local service. The RBOCs' response was to refuse to talk to us without a gag order
on the negotiations, forcing us to seek mediation. Recently, with the leadership of
the Michigan Public Service Commission, Ameritech retreated from that position
and has begun to talk to us. But, we spent from March to July without engaging
in any serious pricing negotiations based on their unreasonable insistence on put-
ting MCI under a gag order.

Refusal to Negotiate. — Bell Atlantic has refused to negotiate an interim agreement
in New Jersey, despite agreeing to one in Pennsylvania. While we are ready to begin
service and offer competitive choices to New Jersey customers, our switch there lays
dormant because of Bell Atlantic's refusal to negotiate. Similar inconsistent posi-
tions have been taken in different states by US WEST and GTE. In addition. Bell
Atlantic has refused to provide us with any pricing/costing information unless we
agree not to disclose it to anybody.

Such behavior is not indicative of a competitive market. It represents the tried
and true tactic of a monopolist — deter, disrupt, and delay. It is nothing but a fla-
grant attempt by the RBOCs to preserve their monopolies. If successful, these delay-
ing tactics would mean that consumers would have to wait years for the benefits
local competition will bring: lower prices, more choices and better service. This pro-
monopoly behavior is inimical to the purposes of the Act and demonstrates the im-
portance of regulators, both federal and state, managing the transition to competi-
tion. Before discussing the FCC's challenge in implementing the Act, I'll briefly de-
scribe the "navigational tools" regulators need.

NAVIGATIONAL TOOLS NEEDED TO JUMP START LOCAL COMPETITION

In the months ahead, regulation must play its role as a substitute for market
forces until true competition arrives. Regulatory oversight is needed to ensure that
the proper safeguards are in place during the transition from a single-provider mo-
nopoly market to a competitive one. Regulators should employ a simple and
straightforward set of navigational aids to set the course toward true competition
in local markets by asking, of each regulatory action: Does it create an environment
that promotes investment and the development of an array of new services? Does
it establish prices that mirror a fully competitive environment? Does it provide vigi-
lant oversight against anti-competitive practices?

These are the navigational aids that will lead to open, competitive markets. En-
forcement measures must be simple, yet allow for decisive and swift action by ag-
grieved parties (presumably new entrants). The measures should not require con-
stant policing or modification and should incorporate incentives and disincentives
for just and reasonable resolution of complaints. They must also allow state and fed-
eral regulators to render fair and unambiguous decisions that may be implemented
without untoward delay or confusion. Vigilant oversight means:

Establishing specific deadlines. — For example, both the new entrant and the in-
cumbent telephone company should know the number of days by which an order for
unbundled network elements must be filled.

Specifying what will — and will not — satisfy the rules. — In other words, ambiguity
in the rules will only serve to delay competition.

5 For example, MFS has signed Section 252 agreements with the following RBOCs: SBC,
Ameritech, NYNEX, and Bell Atlantic. The agreements do address most issues but have short-
comings with respect to specific terms and conditions such as resale (restrictions apply; not
priced based on avoided cost pricing, etc.) or access to network elements.

Establishing and enforcing easily-calculable penalties for non-compliance. — Parties
should be clear that unacceptable actions will be met with inescapable and severe
reactions. An adjudicatory proceeding bogged down with questions of intent and mo-
tivation is slow and arduous, which creates an incentive for delay. On the other
hand, easily-applied sanctions that penalize unacceptable and discriminatory behav-
ior will create the appropriate incentives for compliance. For example, pursuant to
the Act, any carrier caught "slamming" will lose any charges that it unlawfully re-
ceived. Similarly, any local competitor that fails to satisfy a customer's order to
change his/her local service provider should also forfeit all charges assessed to the
customer since submission of the order (including access charges). Ineffective en-
forcement in implementing rules will significantly delay local competition.

So far, the FCC has made a good start in its implementation of the Act, but many
challenges lie ahead.

IMPLEMENTATION OF THE ACT: THE CRITICAL REGULATORY "TRILOGY"

Recognizing that the transition from monopoly to competition could not occur
overnight. Congress established a detailed schedule and sequencing of key events
in the Act that, over the next few years, have the potential for unleashing the full
force of telecommunications competition on the U.S. economy. As Congress provided
and the FCC has recognized, three events — the regulatory "trilogy — form the cor-
nerstone of future telecommunications policy:

National Local Competition Rules. — ^Adoption of national rules is needed to foster
local competition throughout the U.S.

Universal Service Reform. — A competitively-neutral universal service plan that in-
creases the number of Americans on the network, that provides affordable local
service as well as access to basic and advanced services, that ensures that all car-
riers contribute on an equitable basis and that eliminates a system of hidden sub-
sidies that are as outmoded as the rotary dial phone is necessary to achieve high
levels of usage while denying monopolies corporate "welfare" payments.

Access Charge Reform. — Cost-based access prices are necessary to achieve the pol-
icy of bringing competition to all telecommunications sectors.

Like any literary trilogy, each part must not only stand on its owti strength, but
must also be viewed relative to the whole to be fully understood.

The FCC's national local competition rules

On August 1, the FCC completed its work on part one of this poUcy trilogy — its
local competition rules. It passed those rules on to the state commissions for imple-
mentation as part of the negotiation and arbitration procedures to open local mar-
kets to new entrants. From MCI's perspective, the steps thus far, while not perfect,
have been largely positive and pro-competitive:

National Rules. — While MCI will have to engage in state-by-state entry negotia-
tions and arbitrations, we now have firm ground beneath our feet in the form of
national rules that define a baseline of local competition requirements. States retain
flexibility to add to the basic rules that the FCC outlined.

Adoption of an Economic Cost Methodology. — A forward-looking economic cost
methodology is the hallmark of a competitive market and this is what the FCC se-
lected. Such a model provides incumbent telephone companies with a reasonable
profit and enables them to recover a share of joint and common costs.

Default Prices. — Even those states that lack resources to evaluate cost studies
right away may jump start local competition. States remain in the "driver's seat"
and can select their own prices consistent with the FCC's cost methodology.

The FCC still faces considerable challenges in completing the next two parts of
the trilogy. In a competitive marketplace, there is no place for guaranteed profits
and unneeded subsidies. Competition in both the local and long distance markets
will be adversely affected if competitors are forced to pay incumbent monopolies out-
rageously inflated access charges that are seven times above the cost. Achieving
competitively-neutral universal service reform and reducing access charges to cost
are two necessary steps in truly moving forward the pro-competition agenda.

The need for universal service reform

Local competition rules will be effective only to the extent that the current system
of local telephone subsidies is made rational, explicit, and available to all competi-
tors.

FCC adoption of competitively-neutral rules to promote competition. — Current uni-
versal service subsidies, which are based on the local telephone company's historical
costs, would protect it from the market discipline on its prices that competition
should provide. As long as the universal service funding mechanism involves sub-
sidies that are internal to the incumbent monopoly, potential competitive providers

of local service — even if more efficient — would find it difficult to compete with the
incumbent.

All carriers must pay into the fund. — Universal service contributions should be
made on an equitable basis by all providers of telecommunications services, based
on their relative revenue shares, net of payments to other carriers. Recovering uni-
versal service support from all carriers would eliminate current incentives for car-
riers to avoid those services that pay for the universal service programs.

Ensure affordability of local service. — A competitive market will, over time, drive
down today's above-cost price of local telephone service to economic cost. Today, the
cost of serving low income consiimers and customers in high cost areas likely ex-
ceeds rates that those customers are willing to pay or rates that regulators find ac-
ceptable. The universal service fiind subsidies must bridge the "affordability gap"
until competition drives prices sufficiently low. In addition, rates set at economic
cost may be unaffordable for low-income consumers.

The need for access charge reform

As the FCC has recognized in other contexts,^ the RBOCs have the ability and
the incentive to squeeze their competitors by overcharging them for key inputs (i.e.,
access to the local networks to reach customers) that competitors need to originate
and terminate calls. Given the size of the revenue generated from access charges —
long distance company pajrments exceeded $23 billion in 1995 — the RBOCs' incen-
tives to act anticompetitively are significant and undeniable. MCI has filed studies
with the FCC demonstrating that access charges today are approximately seven
times their economic cost. The total interstate switched access charge is now about
three cents per minute for the use of RBOC facilities which, according to Hatfield
Associates, cost less than four-tenths of a cent per minute to provide.

Local access is the most lucrative line of business for the RBOCs, with margins
about three and one-half times more than the long distance industry, helping to
make the RBOCs among the wealthiest corporations in the world. They have the
highest operating cash flow margins of any U.S. industry — greater than oil compa-
nies, electric utilities, and drug companies, and much greater than the long distance
industry. Two companies with second quarter revenues similar to MCI's, GTE and
BellSouth, are twice as profitable as MCI. The other RBOCs' margins are similar.
Why? Because they operate in sheltered monopoly markets. They are rich enough
to invest heavily in foreign telephone markets — and to offer premiums to acquire
each other.

If the RBOCs were allowed to enter the long distance market before the access
charge regime is reformed, the current outrageously high level of access charges
would give them a tremendous — and tremendously unfair — advantage. Competitors
can't be saddled with inflated access charges that subsidize the RBOCs' entry into
long distance if real competition is to be created in local markets and retained in
long distance. Even if an RBOC is required by law to "impute" the above-cost access
payments (as the Act requires of an RBOC long distance affiliate), all the RBOC
is doing is moving the money from its long distance side of the business to the ac-
cess side of its business. The long distance business, to the extent it continues to
rely on over-priced RBOC-provided access, would be imperiled. The only pro-com-
petition solution requires that access charges be reduced to cost immediately. MCI
would much rather give that money to our customers through lower rates than hand
it over to the RBOCs. In fact, MCI has publicly committed to flow access reductions
through to our customers and your constituents.

THE PROPOSED RBOC MERGERS WILL HARM COMPETITION

The recent announcements of two pending RBOC mergers are alarming and ought
to be opposed. By choosing the route of consolidation rather than competition, SBC
and PacTel, and Bell Atlantic and NYNEX provide further compelling evidence of
their ambition to thwart the development of competition in their local monopoly
markets. It is not coincidental that these mergers were announced only two months
after passage of the Act. The new law significantly increased the vulnerability of
each RBOC to competition in its core local markets and permitted each to offer out-
of-region long distance services. That vulnerabiUty and that opportunity created a
clear and present danger that the RBOCs would actually compete with each other
in local markets. Rather than compete in each other's markets, four RBOCs have
announced their plans to consolidate and head off competition.

•^ Local Exchange Carriers' Rates, Terms, and Conditions for Expanded Interconnection
Through Virtual Collocation for Special Access and Switched Transport, Report and Order, CC
Docket No. 94-97, Phase I, 10 FCC Red 6403 (1995).

The mergers, if approved, will frustrate local competition. Indeed, the RBOCs spe-
cifically defend the proposed mergers principally on the ground that they will not
reduce current levels of actual competition.'' The mergers do nothing more than in-
crease the number of local monopoly markets controlled by any single entity and,
they argue, are therefore entirely inoffensive. This view rests on a fundamental mis-
conception of the antitrust laws. Antitrust law is concerned not primarily with the
status of competition now but, rather, with the outlook for competition in the future.
The proper question is not whether the proposed mergers will make the markets
less competitive (they couldn't possibly be), but whether they will stand in the way
of making those markets more competitive.

The mergers should be blocked under section 7 of the Clayton Act

Antitrust law demands a dynamic, not static, analysis to answer such questions.
A forward-looking analysis is especially crucial here because we are at the dawn of
a new telecommunications era. There is no stable historical baseline against which
to measure the likely competitive consequences of the proposed mergers. The rel-
evant markets are characterized by rapid technological change, the dismantling of
regulatory barriers to competition, and the imposition of federal policies specifically
designed to open these markets to competition. Section 7 of the Clayton Act pro-
hibits mergers when there is a reasonable probability that there would be less com-
petition in a given market after a proposed merger than there would be absent the
merger. In MCI's view, this is not a close call. It is extremely likely that local mar-
kets in SBC's, PacTel's, Bell Atlantic's, and NYNEX's regions will see markedly less
competition in the foreseeable future if the mergers are consummated than if they
are blocked. It is our hope and expectation that DOJ will advance the cause of com-
petition, consistent with antitrust law, the 1996 Act and the interests of consumers
nationwide, by moving to block these proposed consolidations.

Numerous factors, alone and collectively, will make realization of the Act's prom-
ise, particularly the development of local competition, substantially more difficult if
the RBOCs are permitted to merge with each other. Briefly stated, the mergers
would have several anti-competitive consequences in telecommunications markets,
including (but not limited to):

Eliminate Key Potential Local Competitors. — Because the merging RBOCs would
be very likely to enter each other's markets absent the proposed mergers, allowing
the mergers will eliminate especially advantaged competitors.

Diminish Opportunities for Non-RBOC Entry. — By eliminating or reducing the
prospects for competitive entry into one RBOCs territory by other RBOCs, the
mergers also reduce the prospects for successful entry by non-RBOCs that would
otherwise benefit from the pathbreaking efforts of the out-of-region RBOCs.

Enhance Opportunity for Anticompetitive RBOC Coordination and Collusion. — ^The
mergers enhance the ability and incentive for the remaining RBOCs to collude in
a strategy of mutual nonaggression, thereby entrenching existing anti-competitive
market allocation.

Increase Likelihood of RBOC Anticompetitive Harm in Local and Long Distance
Markets. — By capturing a significantly larger share of the access market in the com-
bined regions, two "mega-RBOCs" — possessing bottleneck control of over 45 percent
of the nation's phone lines — would substantially shrink the remaining market avail-
able to potential entrants. In addition, by increasing the number of long distance
calls that originate and terminate entirely in-region, the mergers would enhance the
"mega-RBOCs"' access charge advantage as well as their ability to effect nonprice
discrimination against their long distance rivals, thereby strengthening their posi-
tions in the long distance market and, as a consequence, raising the barriers to suc-
cessful entry into their monopoly local markets.

Elimination of key potential competitors

The mergers substantially reduce potential local competition. But for the mergers,
RBOCs would be particularly likely to enter each other's market. It is essentially
indisputable that Bell Atlantic and NYNEX would enter each other's markets to
compete head-to-head if they were prevented from merging. As Bell Atlantic Chair-
man and CEO Raymond Smith noted noted in an announcement of the proposed
Bell Atlantic acquisition of NYNEX, "[Olur two regions are really one big market,

' See Joint Application of Pacific Telesis Group and SBC Communications Inc. To the Califor-
nia Public Utilities Commission, April 26, 1996.

with all the major urban areas up and down the east coast and lots of communities
of interest."** Wall Street and newspaper analysts concurred.^

Similarly, SBC's foreign interests and aspirations provide substantial evidence
that SBC was a likely entrant into PacTel's region. SBC's intentions of being a sig-
nificant carrier of international traffic between the U.S. and Latin America and Asia
cannot be achieved without a strong presence in California. Even more significant
is SBC's ownership and control of Telmex, the Mexican telephone monopoly, that
is frustrating efforts of new entrants to compete in Mexico. Because approximately
50 percent of U.S. -Mexico traffic originates and terminates in the combined SBC-
PacTel regions, SBC's control over local markets in both regions would enable it to
foreclose a substantially greater share of the U.S.-Mexico market that it could at
present. An SBC-PacTel merger would solidify Telmex's power against its rivals to
the detriment of U.S., consumers who call Mexico. SBC and PacTel acknowledge
this in their application to the California PUC for approval, describing the Califor-
nia, Texas, Mexico region as a natural community of interest. In order to secure its
control over this community, SBC would be compelled to challenge PacTel in Cali-
fornia if it could not achieve the same result through merger.

The ehmination of an RBOC as a competitor is significant given that they posses
unique advantages. In particular, the RBOCs have large advantages in trained per-
sonnel, access to and knowledge of operational support systems, favorable treatment
as large customers of vendors of switches and other telecommunications equipment,
an existing relationships with large corporate customers. In addition to operational,
architectural an experiential factors, the RBOCs enjoy substantial financial advan-
tages over other potential local competitors. As noted earlier, the RBOCs are among
the wealthiest corporations in the world and have the highest cash flow margins of
any U.S. industry.

The RBOCs are not the only firms potentially capable of bringing competition to
local monopoly markets, but they do posses unique resources that, if brought to bear
out-of-region, would have a powerful effect on the development of local competition.
Consumers in all four of these RBOC regions will feel the loss of potential entry
that these mergers entail. These mergers will impede the development of competi-
tion in those local markets; prohibiting them will accelerate it. Under Section 7 of
the Clayton Act, the choice is clear.

Mergers diminish opportunity for non-RBOC local entry

Insofar as the mergers eliminate one potential entrant from each of these four
RBOCs' local markets and increase the likelihood that other RBOCs will forebear
from entering those local markets, they also hamper entry by non-RBOCs by extin-
guishing a crucial source of pro-competitive pressure in each of these markets upon
which those other potential competitors must rely. This is true for several reasons.
First, an RBOCs inside knowledge of local network capabilities and limits gives it
an unusual ability to achieve pro-competitive state regulatoiy action. Entrants to a
local market are better able to rebut the potentially obstructionist arguments of the
incumbent RBOC before a state PUC if the entrants' rank include another RBOC.

Second, an entering RBOC can be more effective in negotiations with the incum-
bent RBOC than other entrants because it knows that what technical capabilities
the incumbent possesses. This will benefit all new entrants because, under section
252(i) of the Act, all entrants can avail themselves of the terms and conditions of
an agreement made between the incumbent and any one the them. All entrants suf-
fer when the strongest of potential entrants chooses not to enter. Thus, the reduc-
tion of RBOC competitors also dampens the competitive prospects for non-RBOCs.

Mergers enhance opportunity for anticompetitive RBOC coordination and collusion
The proposed mergers enhance the ability and the incentive for the remaining
RBOCs to forbear from entering each other's markets, thereby entrenching and for-
malizing a territorial market allocation that exists as a result of the antitrust con-

8 Raymond W. Smith, Merger Announcement, Employee Video Conference (Bell Atlantic Media
Relations Home Page)

3 Analysts predicted that "each company's core business would be less susceptible to competi-
tive entry because both Bell Atlantic and NYNEX would have likely been aggressive in attach-
ing each others service territories given the geogrpahic proximity." Dean Witter, Bell Atlantic
to Merge with NYNEX, April 22, 1996 (Guy W. Woodlief); see also Salomon Brother, Bell Atlan-
tic/NYNEX Merger Creates Opportunity, April 22, 1996 (Jack B. Grubman). Press reports were
similar: The April 22 Wall Street Journal reported that "Bell Atlantic and NYNEX * * * serve
adjacent regions and could have turned into each other's worst competitive nightmare. By com-
bining each eliminates a hearty rival * * *." The New York Times, of the same date, observed
that "[A]s NYNEX gazes across the Hudson at the most aggressive Bell company in the country,
merging now probable seems a lot more appealing than the prospect of fighting later."

sent decree that broke up the Bell System in 1984. Since divestiture, the RBOCs
have carefully avoided competing in one another's core local exchange businesses.
The 1996 Telecommunications Act has, however, eliminated those legal and regu-
latory barriers that may have dissuaded the RBOCs from competing against each
other in the past. There should be a strong presumption here against extending the
anticompetitive effects of this territorial allocation by, in effect, making those alloca-
tions permanent through mergers.

More generally, successful RBOC mutual non-aggression and forbearance from
entry into one another's markets is much more likely with fewer competitors be-
cause coordination is easier.'*' The consequences of retaliation are more severe as
the number of RBOCs decreases. Each has more to lose and an increased incentive
to maintain the status quo. Additional RBOC consolidation, which these mergers
will likely stimulate, further increases the prospects of coordinated territorial alloca-
tion.

Indeed, recent testimony by Bell Atlantic's own experts confirms this point. Alfred
Kahn and William Taylor endorsed Bell Atlantic's proposed merger with TCI largely
on the ground that the resulting entity's plan to bring facilities-based competition
to other RBOCs would provoke the "mutual interpenetration of previously exclusive
market territories" that appeared to be the most promising road to true competi-
tion. '^ The TCI merger was not consummated and three years later — within two
months of the Act's enactment — Bell Atlantic proposes to merge with another
RBOC, the most likely and formidable rival in its local markets, instead of compet-
ing head-to-head as it had earlier proposed.

Mergers increase likelihood of anticompetitive harm in local and long distance mar-
kets

The entry, upon authorization, of the "mega-RBOCs" into long distance vrill sig-
nificantly inhibit the development of competition in the local market by shrinking
the amount of access charges potentially available to other would-be entrants. The
merged RBOCs will rely entirely on themselves to provide access to their long dis-
tance services within the merged region. Hence the shift of an important share of
long distance traffic from independent long distance carriers to the RBOCs will re-
duce the potential business available to an independent local carrier. Because access
revenues are such an important part of the local market — more than $23 billion in
1995 — the reduced size of the local access market will substantially limit the incen-
tive perceived by the potential entrant to the local market, thereby reducing both
the number of and viability of local competitors. For example, if SBC does not merge
with PacTel, then when SBC seeks to provide long distance service terminating in
PacTel's region, it will shop for the most advantageous access pricing for terminat-
ing traffic. New local entrants that provide access would vigorously compete for
SBC's business. The merger would remove SBC as a customer for those new com-
petitors in PacTel's local market, making entry considerably more difficult.

The mergers solidify the proposed "mega-RBOCs"' power in the local markets by
enhancing the strength they would exercise in the long distance markets if and
when they are authorized to provide interLATA service. Because of its monopoly
control over the bottleneck local loop, such an RBOC wdll have strong incentives to
engage in non-price discrimination against its long distance rivals. The harm result-
ing from non-price discrimination against MCI and other long distance competitors
were a principal justification for divestiture. '^

RBOCs can discriminate in a number of ways; consider a few examples. An RBOC
can refuse or delay interconnection on the basis of unsupported claims of technical
infeasibility. Or an RBOC can provide degraded connections to competitors and se-
lectively provide superior services to their own affiliates. An RBOC can
discriminatorily use sensitive information MCI and others must provide when estab-
lishing new access arrangements. An RBOC can also refuse to develop access modi-
fications we need, or delay such modifications to give its affiliate time to "catch up."
One last example: an RBOC can make available services to its affiliate before re-
leasing similar services to long distance competitors. In a variety of ways that are
both highly effective and difficult for regulators to detect and police, the RBOCs can

'"See, e.g., Hospital Corp. of America v. FTC, 807 F.2d 1381, 1387 (7th Cir. 1986) (Posner,
J.), cert, denied, 481 U.S. 1038 (1987).

»'Kahn & Taylor AfTidavit, at para. 22.

»2See United States v. Western Electric Co.. 900 F.2d 283,301 (D.C. Cir. 1990) ("BOC entry
into the interexchange market * * * would of course provide an incentive to deny equal access
and to cross-subsidize if possible"). See also Motion to Vacate, Affidavit of Jeffrey M. Perloff and
Larry Karp (submitted in support of motion to vacate), "fl 111 ("The major potential advantage
that the flBOCs have in the long-distance market is through restricting access to other long-
distance carriers.")

and will withhold the cooperation necessary to permit long distance competition to
continue to flourish.

As discussed earlier, the RBOCs can engage in price discrimination against their
long distance rivals as a result of the grossly inflated access charges. Both price and
nonprice advantages are magnified on all long distance calls for which the RBOC
controls the local bottleneck at not just one, but both, ends. The effect on the access
charge advantage is straightforward: it doubles. The only pro-competition solution
requires the reduction of access charges to cost.

MCI estimates indicate that the SBC-PacTel merger would increase the percent-
age of long distance calls that are wholly intra-region for those two carriers by ap-
proximately 20 percent. The proposed Bell Atlantic-NYNEX merger would produce
even greater increases in intra-region traffic. The number of long distance calls orig-
inating and termination in Bell Atlantic's region would increase by nearly one-third
and NYNEX would have about a 50 percent increase.

The mergers' effects on intra-region long distance are significant because the like-
lihood that any given customer will purchase its long distance service from its local
RBOC increases in proportion to the percentage of that customer's long distance
calls on which the RBOC can engage in price and nonprice discrimination at both
ends. The mergers present a distinct threat to competition in the long distance mar-
kets in the Bell Atlantic, NYNEX, SBC, and PacTel regions.

The danger to local competition is even more acute because many customers will
prefer to purchase their local and long distance services from a single carrier. Any
mechanism that enhances the attractiveness of an RBOCs long distance service —
whether or not that mechanism is anti-competitive — will make it harder for new en-
trants to woo the RBOCs customers away for the provision of local service. Insofar
as customers value "one-stop shopping," every long distance customer that an RBOC
captures raises the barrier to entry into the RBOCs local markets. Because those
markets are already monopolies, a merger that increases an RBOCs ability to gain
long distance customers is necessarily anti-competitive.

Each of the factors discussed above will make it more difficult for local competi-
tion to develop. Some will have a more substantial effiect than others. Collectively,
all these factors ensure that the mergers would have a profoundly negative effect
on the development of local competitive and risk significant harm to the already
competitive long distance market.

CRITICAL ROLE OF DOJ IN PROMOTING COMPETITION

Mr. Chairman, the FCCs completion of the local competition regulatory "trilogy"
and thorough DOJ scrutiny of pending RBOC mergers are critical to achieving the
Act's goal of fully competitive telecommunications markets. The Act specifically rec-
ognized the appropriateness of DOJ's review of such mergers.

Equally important is DOJ's careful review of RBOC applications to enter the in-
region long distance market under Section 27 1 of the Act. Premature RBOC entry
would not only harm an already competitive long distance market, but would also
impede the development of local competition. The RBOCs control of access to vir-
tually every business and residential customer in their regions could be leveraged
anticompetitively in both markets.

Before authorizing RBOC entry into the long distance market, the FCC, in con-
sultation with DOJ, must establish that the petitioning RBOC has met the Section
271 competitive "checklist" of market-opening requirements and that the RBOC
faces facilities-based competition for local services to both business and residential
customers. In making its evaluation. Section 271 specifically states that DOJ may
use any standard it considers appropriate and DOJ's evaluation must be accorded
substantial weight by the FCC. As the guardian of our nation's competition policies,
DOJ has the expertise and experience necessary to protect consumers and competi-
tors from the anticompetitive conduct of the RBOC monopolies. MCI again acknowl-
edges the leadership of many members of this Committee for ensuring that the Act
includes an appropriately important role for DOJ.

CONCLUSION

Mr. Chairman and members of the Committee, the Telecommunications Act of
1996 provides an historic framework that may unleash virtually unlimited opportu-
nities for companies to provide new services in environment replete with customer
choice both in features and price. The details of how the framework is implemented,
however, are critical. The result vdll either pave the road to competition or will pro-
vide an impenetrable roadblock. The FCC must complete the regulatory trilogy and
the DOJ must stand guard against anticompetitive proposed activities.

Last month, the FCC made a good start when it issued the local competitive rules.
Early next year, it will complete the trilogy by issuing regulations implementing
needed reforms on universal service and on access charges. The Act calls for a com-
petitively neutral universal service mechanism. The subsidies that all competitors
will pay to this fund must be equitable and expUcit and must be coupled and reform
of the existing access charge system which presently requires some potential com-
petitors to pay charges that are seven times above the RBOC's actual cost. Both of
these rulemakings are critical to ensure that no one player in the marketplace — es-
pecially an incumbent monopoly — is at a significant, unfair advantage to its rivals.

Of equal importance, the DOJ must continue to play its traditional role as the
guardian against anticompetitive economic activities in this country. The members
of this Committee are to be commended for insisting that the final legislation in-
cluded an important and appropriate role for the DOJ in reviewing RBOC entry ap-
plications. Together with the DOJ's long-standing antitrust role, this is critical to
ensuring that competition in the telecommunication field will flourish. Proposed mo-
nopoly mergers, such as those envisioned by Bell Atlantic and NYNEX and SBC and
PacTel are the antithesis of competitive that the legislation envisioned. The Act did
not envision the growth and consolidation of existing monopolies, but rather the
opening of monopoly markets.

Mr. Chairman, I appreciate having the opportunity to testify today. I applaud the
Committee for its attention to and oversight of these important competition issues.

Senator Thurmond. Mr. Barr.

STATEMENT OF WILLIAM P. BARR

Mr. Barr. Thank you, Mr. Chairman. I am privileged to appear
here today before the committee. As you know, I represent GTE
Corp., and in a way we don't have a dog in this fight because we
are not involved in a merger. We are a local exchange company. We
are not part of the Bell group. We operate in 28 States, and after
the legislation has passed we have now started offering long dis-
tance. We are in 20 States offering long distance, adding 6,000 cus-
tomers a day to that line of business.

In addition, we have filed to compete against other LECs. In
Texas, we have filed to compete against Southwestern Bell. In Cali-
fornia, we have filed to compete against PacTel, and we have filed
to compete in Virginia and Pennsylvania against Bell Atlantic. So
from a narrow business perspective, it is not in GTE's interest to
see these two mergers occur, to the extent that they create more
formidable competitors for us. But we are not here to plead a spe-
cial case and try to derail potential competitors. What we are try-
ing to do is help this committee's assessment of the antitrust impli-
cations of these mergers.

I see no basis for concern from an antitrust standpoint. Clearly,
as far as the local exchange is concerned, the proper analysis is for
potential competitors, and I have heard the four companies in-
volved saying they did not have plans and I take them at face
value, and certainly the Justice Department will review the docu-
mentation. But even that is not the critical issue. The critical issue
is whether or not they are singularly suited and uniquely qualified
to be the principal competition of each other, and that clearly is not
met.

The test really is, does the prospect of developing competition up
in NYNEX's market rest really on the shoulders of Bell Atlantic,
and to suggest that it does is simply nonsense. It has no bearing
in the real world. There are numerous existing entrants already
and there are numerous potential entrants that pose a far greater
competition threat to NYNEX and Bell Atlantic than those two
companies do, and the same with respect to SBC.

As far as the interLATA market is concerned, the argument real-
ly is another dusted-off version of the antiquated bottleneck argu-
ment that somehow they will unfairly leverage their position in the
local market to gain advantage in interLATA. Let me just say that
now that we have equal access in effect, now that we do have
emerging competition, and now, on top of those things, that we
have a 14-point checklist that the RBOC's have to meet before they
are allowed into long distance, that argument of the bottleneck
really evaporates. We are not talking about a bottleneck anymore.

Let me just say that there has been some skepticism about
whether or not there is actual competition in the local market, and
I would like to use Senator Leahy's example because I think it real-
ly offers a very good illustration.

The fact is, Senator, here on Capitol Hill you do have a choice
of what phone to use. I was very amused that Mr. Ebbers was sit-
ting here acting as if there was no local competition. This is a very
profitable center here, Capitol Hill. You can imagine all the calls
that are made from here. Well, the fact is Bell Atlantic doesn't
serve it. It was taken away by MFS. It is being served by a CAP.
That is where the margin is, that is where the competition is.

Now, up in Vermont, I don't know for a fact, but I would bet that
you are being subsidized, that the money you pay every month for
local phone service is not covering the cost. The person who is pick-
ing up the difference is a business in Vermont, such as Ben and
Jerry's, and I bet you right now Ben and Jerry's has a choice and
I bet you there are CAP's and they are trying to get Ben and Jer-
ry's business. No one is interested in your business. Senator, be-
cause you are not paying costs.

Senator Leahy. Both Ben and Jerry can afford it a lot better
than I can. [Laughter.]

Mr. Barr. ok. Let me just say that I think the overall point
shouldn't be lost. I think we are in a time warp, and my overarch-
ing concern about how you are looking at telecom deals is don't get
locked in the mindframe of 1984 and the theoretical problems that
were identified then. Look at what is happening today, and, I
think, when you see what the FCC order, it is a radical overturning
of what Congress tried to do in the Telecommunications Act.

What it does is it says that — where Congress said that when peo-
ple come in and try to set up competition and set up facilities and
they want to piece together a network, they have to pay the cost
to the incumbent facility-based LEC, the FCC has come along and
said, no, you are able to pay a very deep discount, more than 40
percent, for their facilities. This really converts the local exchange
company into a wholesale platform, and when you look at who is
going to be powerful in the game of packaging services that are es-
sentially bought from a wholesale provider and labeling them, it is
the companies with the brand names and the customers, and those
companies are the EXE's principally right now.

With that, I will stop my prepared remarks.

[The prepared statement of Mr. Barr follows:]

Prepared Statement of William P. Barr

I appreciate the opportunity to offer my views on the important topic before this
Committee today, and I thank Chairman Hatch and the other members of the Com-
mittee for inviting me to appear.

Let me begin by noting that GTE currently provides wireline local exchange serv-
ice in 28 States and wireless service in 16 States. The States that GTE serves in-
cludes States that will be part of the combined Bell Atlantic-NYNEX region, States
that will be part of the combined SBC-Pacific region, and local service areas in
which LDDS Worldcom-MFS is or will be competing. Presumably, these mergers are
being undertaken because the merging parties believe that they will gamer effi-
ciencies from merging. To the extent that the mergers make them more effective
competitors, it is not in GTE's interest to welcome any of these three mergers. The
question being addressed by this Committee, though, is whether any of these merg-
ers presents serious antitrust concerns, and, as the general observations that I will
outline indicate, I believe that it is clear that they do not present any such concerns.

I have four general — and interrelated — observations that I believe ought to inform
antitrust analysis in the telecommunications industry today:

1. In many places, and especially in key markets, the so-called local bottleneck,
on which so much of antitrust regulation of local exchange carriers was premised,
has been opened up wide. In enacting the landmark Telecommunications Act of
1996, Congress recognized what the marketplace has showm: the local exchange
market is, in many places, no longer characterized by the economics of natural mo-
nopoly. In other words, competing local carriers can profitably enter the market and
provide services to the consumer. Therefore, the traditional antitrust concern that
a local exchange carrier might leverage its power in the local exchange market into
other product markets has been dramatically lessened.

2. In addition to actual new entrants in the local marketplace, there is a legion
of powerful potential new entrants, including those entities currently operating as
interexchange carriers, competitive access providers, and wireless providers. In
short, an incumbent LEG serving an attractive service area faces a broad array of
competitive threats. While an adjacent LEG — that is, a LEG serving an adjacent
service area — may also be a potential entrant, there is no reason to believe that
such a LEG has any significant overall advantage over other entrants, and there
is therefore no reason to believe that the competitive threat from that adjacent
leg's actual or potential entry will significantly affect the development of competi-
tion.

3. Local exchange carriers are subject to pervasive regulation by both the FGG
and state public utilities commissions. Such regulation is more than adequate to
prevent and detect any anticompetitive abuses by local exchange carriers. Indeed,
the real danger to competition is that excessive, onerous regulation will prevent in-
cumbent local exchange carriers from competing on a level playing field with the
new entrants. The Federal Communications Commission's recent rules purporting
to implement the Telecommunications Act of 1996 highlight this danger. Contrary
to the pro-comeptitive, deregulatory intent of Congress in enacting the Act, the 668
pages and 3,276 footnotes of the FCC's First Report and Order require incumbent
LECs to subsidize their competitors through below-cost pricing and force incumbent
LECs to operate their networks for the benefit of competitors. Under the FCC's sys-
tem, it make no sense for any competitor to develop its own network. Instead of real
competition that spurs investment, creates jobs, and improves services, the end re-
sult of the FCC's rules will be a scheme of contrived "Potemkin competition" in
which so-called competitors merely rebrand services purchased below-cost from a se-
verely handicapped incumbent LEG and create the false appearance of competition.

4. Recent academic research strongly indicates that the long-distance market is
ciurently characterized by oligopolistic pricing by the three leading interexchange
carriers (AT&T, MCI, and Sprint). To the extent that any merger increases the pros-
pect for vigorous competition in the long-distance market in the long run, it ought
to be viewed very favorably by antitrust authorities.

What all of these observations together suggest is that the proper role of antitrust
with respect to mergers and acquisitions of local exchange carriers will be a limited
one. Such transactions will not typically present any serious antitrust concerns, and
one ought especially to be highly skeptical when such concerns are voiced by power-
ful industry competitors.

Senator Thurmond. We will be glad to hear from you, Mr. Atkin-
son.

STATEMENT OF ROBERT C. ATKINSON

Mr. Atkinson. Thank you, Senator Thurmond and Senator
Leahy. Teleport Communications Group [TCG] is pleased to testify

today on the impact of mergers of Bell operating companies on local
exchange competition.

As background, TCG is the Nation's leading competitive local ex-
change carrier, or CLEC. We operate in California in competition
with Pacific Telesis, in Texas and Missouri in competition with
Southwestern Bell, and in most of the States in the NYNEX and
Bell Atlantic regions. From 10 years of experience, we draw the fol-
lowing conclusions about these mergers.

The BOC mergers, we believe, will cause chaos, confusion, and
distraction within the resulting Big Bell, leading to substantially
worse operational performance by that Big Bell. In particular, serv-
ice intervals, quality and reliability are likely to deteriorate sub-
stantially, at least for a number of years. This will be terrible for
all consumers.

Ironically, because BOC's will continue to control unique essen-
tial services and facilities for the foreseeable future, CLEC's are be-
coming more dependent on the performance of the BOC as they
grow and expand. Consumers hold CLEC's accountable when a
BOC service or facility used by the CLEC fails. Consequently, a
substantial deterioration of a Big Bell's operational performance
will increase a CLEC's costs, hurt its reputation, and impair the
CLEC's ability to compete effectively and to provide consumers
with an alternative to the Big Bell's poor retail services.

The Telecommunications Act requires a BOC to provide competi-
tors with performance quality no worse than it provides to itself,
but this is not a competitive safeguard if the BOC's quality is dete-
riorating. Moreover, traditional regulatory processes have proven to
be very inadequate for encouraging BOC's to provide high-quality
services to competitors.

CLEC's and consumers should not be dragged down if the Big
Bell's performance goes down. Therefore, as a minimum, BOC
mergers should be conditioned on the Big Bell maintaining oper-
ational performance for CLEC interconnections at levels no worse
than today's mediocre performance. Of course, a condition requiring
steadily improving BOC performance in providing interconnections
would promote better service to consumers and more effective com-
petition.

BOC's must be subject to swift, certain and substantial penalties
for imposing poor performance on their competitors. A BOC that
does not expect its service to deteriorate as a result of the merger
should not object to a condition requiring only the status quo. But
opposition to such a condition implies that the Big Bell expects its
performance to deteriorate or that it intends to use its control of
essential monopoly network elements to competitively disadvantage
CLEC's. Alleged consumer benefits of BOC mergers cannot occur so
long as CLEC's are subject to anticompetitive behavior on the part
of the Big Bell. The existing monopoly will simply become further
entrenched if a Big Bell is permitted to control its competitor's
service quality and costs.

Thank you for allowing me to make these brief remarks and I
look forward to responding to your questions.

[The prepared statement of Mr. Atkinson follows:]

An i:nr\ m

Prepared Statement of Robert C. Atkinson

Good morning Chairman Hatch and members of the committee. TCG is pleased
to testify today on the key subject of mergers and competition. I am Bob Atkinson,
TCG's Senior Vice President for Legal, Regulatory and External Affairs. TCG is the
nation's leading competitive local exchange carrier, serving 51 major markets with
state-of-the art fiber optic backbone networks supplemented by wireless facilities.
We provide local exchange access services to long distance carriers, intra-LATA toll
service, and switched local exchange services. We do business in California in com-
petition with Pacific Telesis, in Texas and Missouri in competition with Southwest-
ern Bell, and in most of the states in NYNEX and Bell Atlantic's regions.

My message is very simple. Mergers are desirable if consumer benefits result.
Mergers of two giant telecommunications companies each having 99% of their mar-
ket are not likely to benefit consumers so long as the relevant markets remain mo-
nopolized.

TCG is a company that has begun to "demonopolize" the markets of every Bell
Operating Company (BOO. TCG can do this quickly if the BOCs — and especially
any merged BOCs — are compelled to treat TCG in a pro-competitive manner, all the
time, forever. The way to assure this was explicitly recognized in the Telecommuni-
cations Act of 1996: The incumbent local exchange carriers, who must now inter-
connect with their competitors, must treat their competitors at least as well as they
treat themselves. [Sec. 251(c)(2)(C)]^ TCG therefore believes that any BOC merger
should be conditioned on the observance by the BOCs of explicit performance stand-
ards in making their essential facilities available to competitors. The standards
must have teeth in them, so that the BOCs will have the financial incentives to
achieve them.

The proposed mergers of Bell Atlantic with NYNEX and Pacific Telesis with SBC,
like any mergers of huge corporations, initially are going to create chaos in those
corporations. There can be no doubt that the BOCs will be distracted from their
daily operations as they blend their disparate corporate cultures, operation support
systems, billing systems, etc. Inevitably following a restructuring of such magnitude,
employees will be focussed on internal concerns. In a truly competitive market, TCG
might in fact be advantaged by the resulting chaos, to the extent that it will dimin-
ish our rivals' ability to provide good local exchange and exchange access service to
its customers. But, the local telecommunications markets are not fully competitive,
and one consequence of chaos within the BOCs could be very damaging to TCG: It
will make it even more difficult for the huge entity of the merged BOCs — I'll call
them the "Big Bells" — to provide good service to TCG.

I know this will be a problem post merger, because it is a problem now. TCG al-
ready has had years of bad experience in interconnecting with BOCs, particularly
NYNEX and SBC. They fail to turn up circuits on time, they fail to complete con-
struction on time, they fail to deal with trouble reports on time.^ I believe that
BOCs post merger, will be even less likely to make it easy for their competitors to
obtain from them in a timely fashion the essential network facilities the competitors
must have in order to compete with them. The potential harm to TCG caused by
such failure is greater as TCG expands its switched business.

Contrary to what you might expect, this expansion, which requires the inter-
connection of more and more TCG facilities with BOC facilities, will for a transition
period make all supposedly competitive local exchange carriers more, not less, de-
pendent on BOC service quality. The technology and capabilities of incumbent LECs
will become more, not less, critical to TCG. When a BOC fails to turn up a circuit,
TCG customers blames TCG, not the BOC. The chain of telecommunications service
in our world of interconnected networks is only as strong as its weakest link. TCG
backs it reputation as the carrier with the highest possible service quality by mone-
tary guarantees to our customers — if our service quality falls below the standard we
promise, we don't charge the customer. If the BOC link in the chain fails, TCG suf-
fers financially and our reputation can also be impaired.

The BOCs' ability to raise their rivals' costs through delay and error is the great-
est threat to full competition in the local exchange market. This may be intentional,
or it may be accidental, but whatever the cause, the effect is anticompetitive. This
ability is not constrained at all now. Although TCG has complained to both state

• An incumbent LEG has the "duty to provide, for the facilities and equipment of any request-
ing telecommunications carrier, interconnection that is at least equal in quality to that provided
by the local exchange carrier to itself or to any subsidiary, affiliate, or any other party to which
the carrier provides interconnection ♦ * *"

2 For example. Between March 1996 and July 1996, despite assurances from NYNEX that per-
formance would improve, it did not. Of the six performance measures that TCG monitors quar-
terly, all but one were rated Unacceptable, compared to objectives set by TCG and NYNEX.

and federal regulators, the plain fact is that regulators, given the procedures they
are legally required to follow, cannot fix TCG's problems quickly enough to mitigate
all the harm that a BOC can cause TCG. Since Big Bells will have a much, much
larger pie at stake,-^ after the proposed mergers, their incentive to continue dilatory
behavior and foist inefTiciencies on their competitors can only increase.

Interconnection agreements between BOCs and competitive local exchange car-
riers may provide such safeguards, but the BOCs, once they have merged, and once
they have achieved entry into the interLATA market, will lack any incentive to
honor the agreements. SBC, Pacific Telesis, NYNEX and Bell Atlantic know from
experience, that the traditional regulatory process is completely ineffective when it
comes to compelling them to treat competitors fairly. Thus, it is clear that the BOC
mergers must be subject to a reasonable safeguard outside the traditional regulatory
process to prevent such anticompetitive conduct.

The merging BOCs should enter into a Consent Decree providing for significant
performance standards, together with meaningful penalties for their failure to meet
the standards. The BOC must, by the intent of Congress, offer and interconnecting
local exchange carrier service quality at least as good as what it offers itself As re-
quired by the FCC ruling in Docket 96-98, standards assuring high quahty in inter-
connection and interoperability must be referenced to the internal standards of the
BOC. They must be subject to objective measurement.

Because we believe that the disruptions of the mergers will cause the BOCs' own
internal performance to deteriorate, it is not good enough to reference the internal
standards of the Big Bell after the merger. Rather, at least the standard realized
prior to the filing of the Hart-Scott-Rodino request should be provided to TCG. Then
Big Bell's service to TCG can't get worse, post merger, if the internal reference
standards of Big Bell get worse. When Big Bell's service quality improves above that
pre-merger level, TCG and all other interconnecting local carriers should receive the
same quality.

If the BOCs claim, as they are now doing in the context of negotiations with TCG,
that they have no such internal standards, then they have to develop them. The
BOCs do have standards for service to their customers, and since the Act also re-
quires that the quality of service offered CLECs must also be at least as good as
what it offers any other carrier or any customer, they can adapt those to their inter-
nal practices as well.

But a standard is meaningless if failure to meet it results in a slap on the wrist.
We have seen how ineffectual public utility commissions' fines for poor retail service
have been: the BOCs pay the penalty, and make another promise, but service
doesn't get any better. The same behavior cannot be allowed with respect to peer
carrier service, for the result would be to curtail the opportunity for the peer car-
riers like TCG to protect the public from monopoly abuse by developing alternative
networks and service offerings. Thus, a BOC or a Big Bell must face a hefty penalty
if it fails to meet its performance standard. The penalty amount should grow larger
for each incidence of the same failure. A Big Bell should be subject to at least twice
the penalty of either of the merging BOCs would have been subject to, to reflect the
greater value to Big Bell of impairing rivals' service over a much larger territory.

I have attached an illustrative list of minimum standards that TCG believes to
be reasonable and appropriate.

How could a company of good intention object to this proposal? If the Big Bell —
or any BOC, for that matter — intends to live up to the requirements of the Tele-
communications Act, it should have no difficulty in committing to strict performance
standards. If the Big Bell intends to meet the standards, and intends to incent its
employees so that they will treat competitors as well as they treat themselves or
other customers, the Big Bell should be perfectly willing to enter into such a Con-
sent Decree. And if a Big Bell opposes tough performance standards in a Consent
Decree, doesn't that show the Big Bell's intent to use its control of essential monop-
oly network elements to competitively disadvantage its peer local exchange carriers?

Mr. Chairman, I have only one other suggested condition for any BOC mergers.
As a threshold matter, all of the conditions required by the Act for BOC entry into
the interLATA market should be satisfied before a merger is approved. The Section
271 requirements speak the Congressional intent that BOCs not be allowed to ex-
pand vertically until local markets are arguably open to competition. The BOC
mergers are in essence vertical expansions from a geographical standpoint.

3 To put the size of the proposed Big Bells into perspective, consider that Bell Atlantic and
NYNEX will have, in local telecommunications alone, approximately 40 million access lines, rev-
enues of nearly $24 billion — apparoximately 25% of the approximately $100 billion national rev-
enues from local telecommunications — and EBITDA of over $11 billion.

In conclusion, TCG is entering new markets. We are adding switches at an im-
pressive clip. We have signed interconnection agreements — pursuant to the Tele-
communications Act of 1996 — with two of the BOCs that are subjects of proposed
mergers: NYNEX in New York, and Pacific Telesis. (Notably, however, the merger
partner of each of these BOCs has been totally unwilling to enter into a negotiated
agreement.) By November 8 we will have a negotiated or arbitrated agreements
with all of the BOCs. Thereafter, TCG will be able to plan ahead with better knowl-
edge of its monetary costs for interconnection and for use of BOC or merged BOC
network elements. But, TCG should not have to plan for the costs of substandard
performance quality in providing those essential functions and capabilities.

Thank you for the opportunity to present TCG's view.

ATTACHMENT 1 .—INTERCONNECTION PERFORMANCE MONITORING
(For illustrative purposes only)
For each type of facility, Performance Standards should be set for:
Installation

Number of Installs
Time taken for Install
Percent on time

Quality of Service
Number of Failures
Percent Availability
Mean Time to Repair

Grade of Service
Bit Error Rate
Blocking Rate

ATTACHMENT 2.— SUMMARY OF NYNEX PERFORMANCE FOR TCG (JAN. 1994-MARCH, 1996)

Three Examples of "Report Cards" maintained by TCG to measvu^ the perform-
ance quality of the BOCs with whom TCG interconnects:

Private Line Percent Availability — Declined;

Private Line Failure Rate — Increased;

Mean Time to Repair — Increased.
In addition to the above, performance measures in TCG's mrrent report card are:

Scheduled Dispatches for Repair;

Pro-Active Status Updates wnen Outages Occur;

Service Improvement Plan;

Escalation Call Backs.

Senator Thurmond. Thank you very much. We thank all of you
for coming.

Now, we will ask questions and each Senator will have 7 min-
utes.

Would each of you please give us your views on concerns raised
about whether effective local competition will ever develop for busi-
ness and residential customers, despite the best efforts of the Con-
gress?

Mr. Salsbury. Senator, I do believe that effective local competi-
tion will develop, first, for businesses and then for residential cus-
tomers. I think it took about 10 years in the long distance industry.
It probably will take a similar time in the local industry, maybe
shorter because of some technological innovations that are coming
sJong, but I do believe it will enter.

It is a fantastically lucrative market right now. If you compare
the local market, which is around $100 billion in revenues and
about a 50-percent profit margin, to the long distance market,
which is smaller and about $75 or $80 billion and only has about
a 15-percent profit margin, we look forward to entering it and we
want to do it as quickly as we can.

Senator Thurmond. Mr. Barr.

Mr. Barr. Mr. Chairman, prior to the enactment of the Telecom
Act, the main inhibition, I think, were the built-in subsidies. There
is competition for business traffic. There won't be substantial com-
petition for residential traffic until there is rebalancing of rates.
Congress' law, I think, did promise substantial competition, or ac-
celerating competition across the board, but I think it has been
sabotaged by the FCC.

My concern is that what you will see develop in the local market
is the incumbent LEC relegated to a wholesaler, unable to compete
as a retailer because they have to provide every service, every effi-
ciency they gain at a very substantial discount below cost. Then
what will happen is the IXEs, who are essentially in a oligopolistic
market at this point, can use their power to come in and replicate
that in the local loop and this is how it will occur.

We have to remember that AT&T, for example, has more cus-
tomers than the RBOC's combined. This isn't like MCI trying to
scratch its way into AT&T's business. These customers are sitting
there inside each RBOC's territory, and my concern is that when
they are able to have the brand name that they do, which is a leg-
acy of the monopoly in the first place, and they are able to retail
facilities at a substantial discount below cost, they are going to be
able to seize market share really based on that market power that
they have developed as a result of their prior monopoly and be-
cause of their position in the long distance market.

Senator Thurmond. Mr. Atkinson.

Mr. Atkinson. Thank you, Senator. I think you have to distin-
guish between resale competition and facilities-based competition.
I think it is clear that in the immediate future you will see lots of
resale competition, but that is pretty illusory kind of competition
because a reseller who is simply just reselling the incumbent
RBOC's services has effectively become a sales agent for the RBOC,
not a competitor.

Facilities-based competition, on the other hand, is what leads to
the substantial consumer benefits of competition because that is
what really puts pressure on the incumbent. The development of
facilities-based local exchange competition is going to take quite a
few years simply because it takes a long time to deploy facilities
ubiquitously up and down every street in every community across
the country.

Nevertheless, I am quite optimistic that even the facilities-based
local exchange competition will develop, but that will be perhaps as
long as a decade from now. In the meantime, I think policymakers
particularly have to be not misled by the apparent resale competi-
tion and mistake that resale competition for facilities-based com-
petition.

Senator Thurmond. Mr. Salsbury, what similarities or dif-
ferences do you see between MCI's early efforts to break into the
monopoly long distance market and your current efforts to break
into monopoly local markets?

Mr. Salsbury. Well, right off the bat. Senator, I can see I have
a lot more enemies than I did before. I only had one before. I think
the big difference is that we were able, once the MFJ came about,
to coi3ront a dominant supplier that had no underlying physical

reason for its dominance. In other words, AT&T had a market
share in excess of 90 percent, but it was not because of the facih-
ties or anything else that they owned and it was relatively simple
to replicate the network that AT&T had. It took a number of years
and a lot of money, but there were not any real barriers to doing
that.

This situation where we confront in the local business companies
that are well entrenched, that have a far higher asset base and in-
vestment than AT&T did — it is very difficult to replicate any of
their facilities. It often entails digging up streets and it takes a lot
of time and a lot of money, and we have an entrenched group of
monopolists that are very opposed to that competition.

I smiled when I heard Mr. Barr twice talk about we are trying
to relegate them to the role of wholesalers. I don't really laiow
what he thinks happens in the long distance industry. We are
wholesalers and, in fact, Mr. Barr's own company is providing long
distance service by reselling what they buy at wholesale from Mr.
Ebbers' company. They get discounts of 80 or 90 percent from us
and it hasn't seemed to bother us at all. That is competition.

Senator Thurmond. Mr. Barr, you stated in your written testi-
mony that more efficient competitors are not in the interest of
GTE. Does GTE expect any of the merging Bell companies to start
offering local phone service in competition with GTE in any of the
regions GTE serves?

Mr. Barr. Well, as I said. Senator, we have already filed to go
into their territory and they have filed to come into our territory.
So I think it is safe to assume that that reflects some potential di-
rect competition outside our existing franchise.

To follow up on a point that Mr. Atkinson made, because I com-
pletely agree with him, the critical thing is getting facilities-based
competition. That is absolutely essential. People should not be de-
ceived by reseller competition. There is nothing wrong with resell-
ing, there is nothing wrong with wholesaling, but if you set the
prices so low, which the FCC has done — the FCC says that they
are pricing our system based on the best technology that could be
put into place and the most efficient design that could be put into
place today.

Well, if that is the case, why would anyone want to invest their
own money in those facilities if they can buy them so cheap from
the incumbent LEC? What you get then is potential competition,
not real competition, and that is our concern. So I agree more with
Mr. Atkinson's point that it is important to foster facilities-based,
and I was very amused when the FCC came out and they were
asked specifically at the press conference whether their order dis-
courages facilities-based competition or encourages it and they
couldn't come up with the answer. I understand now they finally
have an answer, which is we didn't know Congress wanted us to
encourage facilities-based competition, as if there is any other kind
of competition.

Senator THURMOND. My time is up.

Senator Leahy.

Senator Leahy. Thank you, Mr. Chairman. General Barr, good to
have you back here.

Mr. Barr. Thank you.

Senator Leahy. You probably have spent more time in your life
before this committee, or parts of it, than you would like to think
about, but it has always been helpful to the committee when you
have been here.

Mr. Barr. Thank you.

Senator Leahy. Could I go into the Ben and Jerry's versus the
Leahy household, because I find that kind of intriguing? I hate to
tell you how many lines I have coming into my old farm house up
in Vermont, between the Senate switchboard and the fax machines
and computers and everything else, but there is no question that
Ben and Jerry's, 5 or 6 miles from where I live, have it a lot dif-
ferent.

I ask this because the Vermont Public Service Board issued a re-
port in January talking about competition and what it might do,
and they said that residential rates might go up as much as $10
per household per month to make up for the increased competition
and the lower rates for business. We are a rural State and for most
people that would be a big bite.

Could you comment on what you might see happening to rural
rates, or rates in rural areas like Vermont, with something like the
NYNEX-Bell Atlantic merger, or in my State or elsewhere? I am
asking the same question, really, of Mr. Salsbury and Mr. Atkin-
son.

Mr. Barr. I don't see the Bell Atlantic-NYNEX merger really af-
fecting it. I think that what has to happen and what is not happen-
ing now is there has to be a decision on universal service which al-
lows for the rebalancing of rates, but then protects the rural cus-
tomer against paying unaffordable amounts by providing an ex-
plicit and rational system of subsidies that everyone contributes to
so the local company is not the only one subsidizing the rural cus-
tomer and therefore having a disadvantage so someone can come
in and skim the cream.

So we need that universal service issue addressed to protect the
rural customer as we rebalance rates to make sure they are not
paying more than an affordable amount. Moreover, the statute has
in it a rural exemption. I think you may have been among those
to support it.

Senator Leahy. Yes.

Mr. Barr. We certainly support it because we have a lot of rural
properties.

Senator LEAHY. I was a supporter of that.

Mr. Barr. Right, and GTE in many of the States is a very rural
company, and that provides an additional protection so that the
local decisionmaker, the State, can make sure that jump-starting
competition is balanced with the interests of the rural customer.
But I think we have to get very quickly to the issue of universal
service, how much do we expect people to afford. Let's get an ex-
plicit subsidy in place, because I think you can see right now until
that is done, the local exchange company is operating at a tremen-
dous and unfair disadvantage because we rely on the subsidy paid
by Ben and Jerry, but then MFS can come along and just take
them away because they don't have to rely on that subsidy.

Senator Leahy. Mr. Salsbury, do you agree with General Barr?

Mr. Salsbury. Some of the things he said. I do agree that for
certain customers, I would say that it depends, of course, on popu-
lation density, how far you are from the serving telephone central
office; the length of the local loop, which is the primary cost ele-
ment in your local telephone service. For customers in less dense
areas who are a long distance away, usually a population density
of around one person per mile, those customers will need universal
service support in order to have their telephone service brought
down to the national average, which is, I think, somewhere be-
tween $18 and $20 per month.

I think most of the other customers already today — local services
is more than compensatory. I would expect the rebalancing that
Mr. Barr spoke about to really involve a lowering of rates, certainly
very substantially for business customers, and certainly for resi-
dential customers, too. They have been paying too much for too
long. But this will follow from the universal service reform.

I would add. Senator, that the act really gives three ways for
local competition to develop. It is very clear on that. One is resale,
one is the use of unbundled network elements, and one is facilities-
based competition, construction of new facilities. I know Mr. Barr
and Mr. Atkinson have focused on the last one, but the other two
are certainly fully legitimate and are the ways that one would
enter the market on a mass basis quickly. They provide the most
hope for residential customers in the near term.

The wonderful thing about competition. Senator, is that people
are very inventive when they see a big pot of money on the table,
and that is what local telephone service is. Right now, the overall
profit margins for local service are around 35 percent. That is quite
a good deal higher than they are for long distance and we are anx-
ious to get in that area. I would certainly assume that rural areas
would have competition more slowly than the urban areas, but I
certainly think it will be there.

Senator Leahy. Mr. Atkinson, what do you feel?

Mr. Atkinson. I think that universal service proceeding at the
FCC certainly is a very important step to making sure that rural
consumers continue to get high quality service. As long as the rural
consumer effectively has access to that subsidy and can direct that
subsidy to any carrier, I would expect a dramatic increase in the
number of entrepreneurial high technology companies that actually
go to rural areas to pursue the subsidy amount and to introduce
new technologies that lower the cost and improve the performance
of rural telephone service. So I think an open universal service sys-
tem will be a magic key to bring better quality and lower-cost serv-
ice to rural areas.

Senator Leahy. The Bell companies under the law have some
interconnection and unbundling requirements. Now, I assume if
the Bell companies start merging, they are going to be focusing a
lot on that merger. Does that interfere in any way with carrying
out their obligations, some regulatory, some contractual, to opening
up a local loop?

Mr. Atkinson. Well, certainly, that is the gist of my testimony.
Senator. Based on our experience, over the 10 years that our com-
pany has been in business, we have been dealing with the Bell
companies and periodically they reorganize internally and have dif-

ferent departments do different things. And every time they have
an internal reorganization, their performance, their quaHty, their
responsiveness to us falls on the floor.

I just have to imagine that something as huge as merging these
two companies will exacerbate those historic bureaucratic problems
to the point where it may make unbundled loops totally unusable
because every unbundled loop is going to have to be hooked up and
an order placed and processed by the telephone company, and if
just the bureaucratic problems, the operations support systems
that have to be merged and all those problems just inevitably are
going to develop, unbundled loops and unbundled elements become
actually unusable and worthless, and that impairs the development
of the local exchange competition and that is a serious problem.
That is why our suggestion is that at least the mergers should not
go forward unless the BOC's are willing to guarantee that they will
maintain the existing level of service.

Mr. Barr. Can I follow up briefly on that. Senator? I think it
would create greater incentive for the RBOCs to meet their check-
list so they can move into the long distance market. I mean, they
are going to be focused on that because right now that is the carrot
hanging out there for them. So I don't think it will inhibit them
from carrying out those obligations.

I think that we can't lose sight of some basic realities in the mar-
ketplace, and Jim Young talked about this. You ask 10 people who
their local telephone company is. Probably four will say it is AT&T.
Even before AT&T got into wireless, when you asked people who
the best wireless company was, 6 out of 10 said it was AT&T, be-
fore AT&T was even in the wireless business. AT&T has a massive
brand and you can't lose sight of the fact that that is the legacy
of the monopoly.

They also have customers — 60 percent of the customers in our
territory and in the RBOCs territory are AT&T customers. You
may be an AT&T customer. Senator. When you get a letter from
AT&T — and it is this simple — if you got a letter from AT&T that
said you don't need two bills anymore, we are not going to send you
a separate long distance bill, we will give you everything on this
one AT&T bill, and then you got one from your local carrier saying
the same thing, what makes the local carrier so powerful there?

I will tell you now. Senator, AT&T is the one with the market
power in that situation, and that is what is going to happen. Be-
cause of the FCC rules and the inhibitions and the restrictions
being placed on the LECs in their own territory and the fact that
this is a brand-name game, that is what is going to happen.

Senator Leahy. Thank you.

Senator THURMOND. Mr. Salsbury or Mr. Atkinson, what is your
response to the argument that there was no particular reason for
initially dividing the Bell System into seven Bell operating compa-
nies instead of five, so there should be no objection now to the pro-
posed consolidations?

Mr. Salsbury. I will take that first, Senator. I am sure glad they
did divide it into seven rather than one. I think really the merger
analysis that would be applied now is a market power analysis. Is
there a substantial reason to believe — is it substantially likely that
allowing these companies to merge would decrease competition in

40-670 97 - 4

the local markets or the long distance markets? As I said, Senator,
there is a substantial reason to believe that.

First, with respect to local markets, these are the most likely
competitors against each other. They know the answers. They
know how the network is put together. They know what to ask for.
I certainly think we are feeling our way and doing the best that
we can as quickly as we can, but we don't know everything about
the local business. They know it. The same way with them coming
into the local distance business; we know much more about it than
they do.

I would minimize somewhat the brand argument that Mr. Ban-
pointed out because the AT&T was not a legacy of the monopoly.
That was all after the divestiture. They invested in that, they cre-
ated that over the last 12 years. The brand before divestiture was
the Bell System.

I really do believe that as we go forward, we will see competition
develop slowly, but these mergers, if they are allowed to go for-
ward, will impede it. The question should really be asked, is it any
more likely that competition will be developed in these markets
with these mergers. As I said, for reasons I said before, these are
the best, most likely competitors, so I think the answer has to be
no.

Senator Thurmond. Senator Leahy, do you have any more ques-
tions for the second panel?

Senator Leahy. I do, but I will submit them for the record. I
know we have a time problem, Mr. Chairman.

[The questions of Senator Leahy are located in the appendix.]

Senator Thurmond. We will now move on to the third panel.
Thank you, gentlemen, for your presence.

We welcome Mr. Peter Huber, Mr. Robert Crandall, Mr. Robert
J. Binz, and Mr. Dale Hatfield. You can now make opening state-
ments of 5 minutes each, starting with Mr. Huber.

PANEL CONSISTING OF PETER W. HUBER, SENIOR FELLOW,
MANHATTAN INSTITUTE FOR POLICY RESEARCH, NEW
YORK, NY; ROBERT W. CRANDALL, SENIOR FELLOW, BROOK-
INGS INSTITUTION, WASHINGTON, DC; RONALD BINZ, PRESI-
DENT, COMPETITION POLICY INSTITUTE, DENVER, CO; AND
DALE N. HATFIELD, CHIEF EXECUTIVE OFFICER, HATFIELD
ASSOCIATES, INC., BOULDER, CO

STATEMENT OF PETER W. HUBER

Mr. Huber. Well, it is an honor to be sitting in the chair just
vacated by a representative from MCI. Almost 10 years ago today,
an issue arose under the divestiture decree, which was whether le-
gally a Bell company had a right to go into another Bell company's
territory to provide local exchange service. It wasn't clear whether
that was permitted under the divestiture decree or not. MCI ada-
mantly opposed it. They said it wasn't allowed under the divesti-
ture decree; the Bell companies should be strictly barred from en-
tering each other's markets under the divestiture decree.

As recently as a year ago — I have been participating in these
hearings for almost as Long as I can remember and I do notice that
all this sudden realization that Bell companies are natural com-

petitors to each other arrived only after the mergers were an-
nounced. Nobody was Hsting them — and I have gone and looked
with some care — virtually nobody was listing the Bell companies as
the principal potential competitors against each other until these
mergers began being discussed. It just wasn't on the record.

You may find one or two stray comments, but I can absolutely
guarantee you, if you look at what the FCC was saying, the De-
partment of Justice was saying, Senators in this very room were
saying at the time in one hearing after the next, there was lots of
talk about who would enter local phone companies and compete
and it was almost never even mentioned of one Bell company enter-
ing against another. There were cable companies mentioned, wire-
less companies, long distance companies, CAP's, MFS, TCG, you
name it; no Bell companies. They were virtually never mentioned.

We are fortunate that we don't have to invent our antitrust law
from scratch. We do have 100 years of history and we have some
pretty good and well-tested criteria for what kinds of mergers are
procompetitive and what kinds of mergers are anticompetitive.

To begin with, antitrust law does not focus on size or access or
diversity or other popular words of this kind. Antitrust law focuses
on market power and what will increase market power or change
market power. Assessed according to that criterion, the real, well-
tested criterion, the headline-making aspect of all these mergers is
that there is no headline. They are just pretty boring, unimportant
events, assessed according to traditional antitrust criteria.

If, perchance, we ever get these mergers tested in court, I expect
that is what a judge will ultimately say. Of course, they may not
be tested in court, but I think if it gets tested in a neutral tribunal,
that will be confirmed. I mean, market power must be assessed in
terms of properly defined geographic markets and product markets,
and this fact is often overlooked. But the local phone markets are
truly local. A phone in New York does not substitute for a phone
in Washington, DC, not a local phone. The long distance markets
are truly national markets. AT&T and MCI have been saying that
for 12 years and they were right about it. They are not New York-
Washington, DC, markets, or Dallas to San Francisco markets.

Second, competition has got to be assessed in terms of a properly
defined product, and all of the trends in the market, certainly not
completed yet, but all of the trends are toward a convergence of
products, cable companies beginning to provide voice over their net-
works, phone companies beginning to provide video, all of them get-
ting into data; in fact, voice, video and data all converging into a
single large digital market.

In that kind of product market, with those trends in force, the
aspects for more competition, the promise of more competition is
very great and these mergers do not implicate that. These mergers
would implicate that potential for competition if we had Bell Atlan-
tic merging with TCI in the Washington, DC, service market, or if
we had SBC and Bell Atlantic merging their cellular operations in
Washington, DC. Those would raise serious antitrust concerns, but
merging a local market in New York with one in Washington, DC,
does not.

The second point is a term like "access" does not define market
power. These merged phone companies will have access to quite a

few homes. DBS satellites have access to about 100 million homes
in this country. AT&T and MCI in various ways have access to es-
sentially every home in the country, but none of those measure ac-
tual market power. We have to look at the real things that do.
What determines market power is differentiation of service, but all
the trends in these markets are toward convergence of services and
rising shares of discreet geographic markets, which these mergers
do not implicate.

Thank you very much.

[The prepared statement of Mr. Huber follows:]

Prepared Statement of Peter W. Huber
market presence versus market power

To the untrained eye, the already huge seem to be getting huger too fast for com-
fort. Big is said to be inefficient. Or the mega-corporation threatens to become too
effective and influential for democracy to resist. ^ Sometimes the concerns are baldly
populist: Big is just plain bad.^ Too-large telecommunicators will end up suppress-
ing telecommunication — free speech — itself^ Ironically, regulators often help create
the leviathan that other regulators then condemn- — by granting exclusive franchises
because economies of scope, network externalities, club theory, and so on, are said
(by the first gang of regulators) to make a single provider more efficient or egali-
tarian than competition.^

The second gang, however, does not see efficiency: it sees Orwell's dystopian vi-
sion. Big Brother Inc., a vast and rapacious network octopus, cornering all commu-
nication and, in the end, controlling everything. Money and commerce are over-
whelming the marketplace of ideas. ^ Excessive concentrations of capital in media
businesses are crushing diversity and suppressing expression nationally and even
globally.*^ They are bringing about a "mutilation of the community's thinking proc-
ess."^ Time Warner, Gannett, NBC, and "media predators like Rupert Murdoch,
Robert Maxwell, and Silvio Berlusconi * * * challenge the traditional view, explic-
itly expressed in the Bill of Rights, that only the state imperils free speech." ^

Vivid rhetoric often substitutes for careful analysis. Basic economic principles are
often muddled — "access" to potential customers, for example, is not market share.
Video programming is distributed to U.S. households over many different media. ^
Over-the-air broadcast reaches 98 percent of households. More than 80 percent of
American households have VCRs. Cable passes 97 percent. Another 4 percent are
equipped with home satellite dishes. ^° When fully deployed, DBS and telephone-
company video services will both reach almost 100 percent. ^^ Thus, many firms can
have ubiquitous "access," just as both Exxon and Mobil can sell gas to everyone.
Market share is not measured by who can drive up to your pump, or how much oc-
tane resides below— it is measured by how much is pumped and paid for. A cable
network like CNN has "access" to virtually every television household in America,
yet enjoys a market share (based on viewing time) of only 1 percent. The more "ac-
cess" a firm has, the more it can compete against everyone else.

Nor is 'Taigness" in itself an antitrust offense. "Deep pockets" or vast financial re-
sources may facilitate anticompetitive conduct, ^^ but they do not make it inevitable.
Concerns about corporate gigantism may have motivated Senator Sherman him-
self, ^^ but the Supreme Court noted that the Sherman Act "offers no objection to
the size of a corporation, nor to the continued exertion of its lawful power, when
that size and power have been obtained by lawful means * * *." '* Size does not
determine guilt. ^^

VOICE, VIDEO, AND DATA

The new, competitive technologies of the broadband telecosm are too fluid and
powerful to be locked into the old, simple, regulatory categories of common carriage
and broadcast.

This is the most important lesson we have learned from cable. Cable is too capa-
cious. It does not fit any neat, bureaucratically convenient pigeon holes. It retrans-
mits over-the-air broadcasts, and when it does, it is essentially a carrier. It provides
leased lines or "public access" channels, and those are even more carrier-like. It
transmits cablecasting — that's publishing. It provides two-way phone service — that's
carriage again.

It is no longer useful to think of broadband pipes as ordinary wires. They are bun-
dles of virtual channels, carrying clusters of constantly evolving services. Cable

channels operated for pure carriage, wthout discrimination, are one legitimate busi-
ness. Cable channels operated for pure cablecasting are another. Cable channels op-
erated for phone service, yet another. And the way a channel is peddled and used
can of course change with time.

All the other broadband technologies now unfolding are chameleons, too. Both
radio and television broadcasters also use parts of their spectrum to provide car-
riage. Many paging services piggyback their signals on FM subcarrier frequencies;
when the resident from Seattle travels to Miami, her office tracks down the beeper
in her pocket with the assistance of FM radio stations around the country. Paging —
a locator service — is bought and sold as common carriage, but it depends on broad-
casting to locate travelers.

Satellite technology straddles the old regulatory divisions as well. Satellite opera-
tors are mostly carriers, except for the four million homeowners who own a large
enough antenna — for them, satellites are direct broadcasters. Higher-powered sat-
ellites can reach much smaller antennas. By scrambling signals, and then selling
decoders, broadcasters redefine themselves as for-pay narrow-casters. Cellular te-
lephony or television can privatize broadcast spectrum even more.

Landline phone companies move in the opposite direction. Video dialtone services
do for video what 976 services did for voice: they effectively transform the telephone
network into a "broadcast" medium, capable of delivering the Super Bowl to millions
of households. A dial-a-pom service is far more like a topless radio station than like
a Sunday afternoon phone call to Aunt Gwendol5Ti in Missoula. Broadcasters, in
short, are mastering the art of keeping the broad while narrowing the cast. Tele-
phone companies are keeping their switched, addressable capabilities while widen-
ing their bandwidth and their reach. Nobody casts drift nets any more. They are
all fly fishermen now.

With the advent of digital technology, the old divisions between voice, video and
data services disappear once and for ail. A full-bore digital, broadband network will
empower everyone to cast broadly or narrowly at will. The on-line world already
does so: anyone can create a bulletin board, and anyone can post musings on it,
whether wise, foolish, tasteful, crass, or crude, to be read by the world. With digital
broadband technology, the text-based bulletin boards will support voice and video.
Broadband carriers will have room to carry anything anywhere; on their networks,
anyone who chooses will be an instant broadcaster. Tomorrow's broadcasters will
have the power to narrow and address their signals at will; on their networks, any-
one who chooses will be an instant carrier.

A few diehard providers may decide to keep their businesses strictly on one side
of the old definitional line or the other, or be forced to do so by reactionary regu-
lators. For the most part, however, the clear, familiar legal divisions between car-
riers and broadcasters will be impossible to maintain. In the broadband telecosm,
"carriers" and "casters" will compete head-to-head in a single unbounded arena.

BIG FISH, BIGGER POND

Because digital services are converging so fast, companies can grow and merge
while still losing market share. Television used to travel by air, telephone by wire.
Today, cable is the dominant medium for transporting television signals over the
last mile to the home. Meanwhile, the fastest growth in telephony is wireless, and
cable companies have been among the most aggressive and ambitious developers of
these wireless services. Telephone companies have at hand the technology to carry
video over their existing networks, and they are now being granted the legal author-
ity to do so.

The effects of this convergence are already evident in many previously discrete
markets. The formerly monolithic Hollywood studios, once the target of major anti-
trust suits, were largely freed of their consent decree in 1987. '<^ The traditional
broadcast networks peaked some years ago, and are now steadily losing market
share. 1'^ Cable has replaced broadcast as the dominant video delivery service, but
now faces challenges from both telephone company video dialtone and from direct
broadcast satellite, i®

The market power of local telephone companies is declining too, though different
observers disagree sharply about how fast. In the United Kingdom, the incumbent
local carrier is losing an estimated 15,000 subscribers a month to cable services, pro-
vided in large part by U.S. cable television companies working in collaboration with
U.S. local telephone companies. ^^ In the 1990s, wireless technology will compete di-
rectly with landline services. The FCC projects 60 million users of new generation
wireless services within ten years.^o Meanwhile, IBM is self-divesting. Even its ad-
vertising now emphasizes the openness of IBM architectures and the compatibility
of its wares, both hard and soft, with those provided by other suppliers.^i

The rising tide of competition in equipment markets is doubly important, because
the substitutabihty of equipment and service is also increasing. This expands mar-
kets yet again. There is, for example, a high substitutabihty between information
processing marketed as a service and information sold as computer software and
hardware or other equipment. Electronic publishing faces the most direct competi-
tion from over-the-air broadcasting and print. And while cable was becoming a
household service, VCRs became a household appliance.

While the technology is converging, the geographic scope of markets is expand-
ing.-^' Telecommunication is, by its nature, a boundary-expanding technology'. As the
geographical boundaries delineating a market expand, the individual players in it
can grow without increasing (or even maintaining) market share. A minnow growing
to the size of a whale will still lose "market share" if the pond is transformed, at
the same time, into the Pacific Ocean.

That is what is happening in the telecom industry today. The big are indeed get-
ting bigger, but the market in which they swim is growing even faster. Viewed as
they must be in the context of the markets for which they contend, the big are
shrinking even as they grow. Anti-bigness regulation should be shrinking a pace.

ENDNOTES

' John S. Shockley, All the Free Speech That Money Can Buy'' The Supreme Court Constricts
Campaign Finance Reform, in Judging the Constitution 378, 389 (Michael W. McCann and Ger-
ald L. Houseman eds.. 1989).

2See, e-g.. Standard Oil Co v. United States. 221 U.S. 1, 83 (1911) (Harlan, J., concurring
in part and dissenting in part); United States v. ATi&T. 552 F. Supp. 131, 163-64 (D.D.C. 1982)
(antitrust laws thus "embody 'a desire to put an end to great aggregations of capital because
of the helplessness of the individual before them.'") (quoting United States v. Aluminum Co. of
America. 1 F.2d 416. 428 (2d Cir. 1945)>; 21 Cong. Rec. 2457 (1890) (remarks of Senator Sher-
man) ("[Ilf we will not endure a king as a political power we should not endure a king over
the production, transportation, and sale of any of the necessaries of life."). Sec generally Owen
M. Fiss, Why the State?. 100 Harv. L. Rev. 781 (1987).

^See. e.g.. Ben H. Bagdikian, The Media Monopoly 90-101, 216-20 (1990). Laurence Tribe,
Toward A Metatheory of Free Speech, in Constitutional Government in America 1 (Ronald
K. L. Collins ed., 1980); Norman Dorsen, The Need for a New Enbghtenment: Lessons in Liberty
From the Eighteenth Century, 38 Case W. Res. L. Rev. 479, 492 (1988).

■*See John Thome, Peter W. Huber and Michael K. Kellogg. Federal Broadband Law §4.2.3
(Boston: Little, Brown and Company, 1995).

^See. e.g., C. Edwin Baker, Private Power, the Press, and the Constitution. 10 Const. Com-
ment. 421, 424-25 (1993); Lee C. Bollinger. Images Of A Free Press (1991).

^See. e.g., Herbeft I. Schiller, Response: Television Is a Social — Not a Biological or Techno-
logical—Problem, 68 Tex. L. Rev. 1169. 1170 (1990).

"Stanley Ingber, The First Amendment in Modem Garb: Retaining System Legitimacy — A Re-
view Essay of Lucas Powe's American Broadcasting and tlie First Amendment, 56 Geo. Wash.
L. Rev. 187, 216(1987).

^Herbert I. Schiller, Response: Television Is a Social — Not a Biological or Technological —
FVoblem, 68 Tex. L. Rev. 1169, 1170 (1990). The anti-business rhetoric is on occasion openly
Marxist: "[Tlhe current scene becomes the most advanced stage in capitalism's long history of
advantaging property rights. Beginning with the ownership of land, the advantage has pro-
gressed to industrial capital, and now to information." Id. at 1173.

^ For a time, the FCC recognized that the distribution market for video programming should
include all sources of video programming. See Notice of Inquiry, Compulsory Copyright License
for Cable Retransmission, 2 F.C.C. Rec. 2387. 2388 (1987); Jonathan D. Levy and Florence O.
Setzer, Office of Plans and Policy, FCC. Measurement of Concentration in Home Video Markets
41-48, 51, 100-101 (1982). Several court judgments have also reflected the determination that
the video distribution market should be broadly defined. See. e.g.. Cable Holdings, Inc. v. Home
Video, Inc.. 825 F.2d 1559. 1563 (11th Cir. 1987); Satellite Television & Associated Resources,
Inc. V. Continental Cablevision, Inc., 714 F.2d 351. 355-56 (4th Cir. 1983), cert, denied. 465 U.S.
1027 (1984). More recently, however. Congress has required the Commission to take a much
narrower view of what constitutes "effective competition" against cable. 47 U.S.C. §543(1X1 KB)
(1994).

'"About 1 percent receive programming by way of SMATV, which has approximately 1 million
subscribers.

"Sf)orts arenas, concert halls, theaters, and 25,000 movie screens provide additional outlets
and, in principle, have "access" to every consumer who is willing to get in a car or on a subway.

^'^See. e.g.. United States v. Aluminum Co. of America. 148 F.2d 416, 429-30 (2d Cir. 1945);
Brown Shoe Co. v. United States. 370 U.S. 294. 317 (1962) (Congress sought to erect barriers
to "the rising tide of economic concentration."); United States Steel Corp. v. Federal Trade
Comm'n. 426 F.2d 592, 603-4 (6th Cir. 1970) ("jTlhe sheer size and financial resources of (the
petitioner) visit non-competitive stabilizing forces upon [its) competitors."); Kennecott Copper
Corp. V. Federal Trade Comm'n. 467 F.2d 67, 78 (10th Cir. 1972) ("[Petitioner] takes strong ex-
ception to the Commission's consideration of the anticompetitive effect of its great financial re-
sources.").

^^See United States v. Aluminum Co. of America. 148 F 2d 416, 428 (2d Cir. 1945) ("In the
debates in Congress Senator Sherman himself * * ♦ showed that among the purposes of Con-
gress in 1890 was a desire to put an end to great aggregations of capital because of the helpless-

ness of the individual before tlien "). See also 21 Conp. Rec. at 2460 (remarks of Senator Slier-
man)

^*United States v United States Steel Corp.. 251 US 417. 460 ( 1920).

'^According to Professors Areeda and Turner, such arpunenti; are "outside tlie conceptual

framework of economic 'science, conceptually indefinite," and "intrinsically immeasurable"'

Phillip Aieeda and Donald F Turner v. Antitrust Late 1] 1 142d ( 1980).

"'Sec John Thorne. Peter W Huber and Michael K. Kellogg, Federal Broadband Law §83.2
(Boston: Little. Brown and Company, 1995).

'"'For example, the networks' aggregate share of the nationwide prime-time viewing audience
had declined from roughly 90 percent in 1970 to around 66 percent today, and tiieir aggregate
share of television advertising revenues declined from 48 percent in 197(j to around 3.3 percent
today. Sec Report and Order. Evaluation of the Syndication and Financial Interest Rules 6
F.C.C. Rec. 3094, 3108-09 (1991); Second Annual Report, In the Matter of Annual Assessment
of the Status of Competition in the Market for the Delivery of Video Programming, 11 F.C.C.
Red '2060, 2114 (1995). Mark Evans, Web Sites Have Content, Need Investors: Market Appeal
of Content-Rich Internet Sites Suffers From High Valuations, Sluggish Advertising, The Finan-
cial Post, July 25. 1996. at sec. 2. p. 25. Advertising revenues for the four main networks are
extrapolated from figures for the first half of 1995.

'*'Scc Second Report and Order, Telephone Company-Cable Television Cross-Ownership
Rules. Sections 63.54-63.58, 7 F.C.C. Red 5781, 5797-98 (1992). See also. Speech of Vice Presi-
dent Albert Grt)re. Royce Hall, UCLA. Los Angeles, California. Jan 11, 1994; The Chicken.
Maybe; A Chicken in Every Pot and Two Wires Into the Home: the F*rospects for Cable Services
Offered by Phone Companies, Broadcasting & Cable, Nov. 15, 1993. at 98.

'^ Dixon. Goodwin & Co.. Technology Assessment— UK CATV/Telephony 2 (Aug 1993). Inter-
estingly, the telephone portion of the cable-telco combination drove penetration growth for the
video side. In the first year cable companies offered telephone service, they saw their cable
subscribership increase by almost 70 percent. By July 1993, less than three years after offering
cable telephony, the number of subscribers to cable television had almost tripled to nearly
475,000. Id.

^° Notice of Proposed Rulemaking and Tentative Decision. Amendment of the Commission's
Rules to Establish New Personal Communications Services. 7 FCC. Rec. 5676, 5688 (1992)

2 'IBM's advertising now declares: "The idea of open systems — that computers should easily
share things and basically behave like friends — is what everyone is aiming for." IBM Advertise-
ment, Forbes. Nov. 23, 1992. at 202.

22 William Landes and Richard Posner maintain that a firm's market power is radically refig-
ured downwards with the expansion of geographic market boundaries. As a firm presses the ex-
tension of its sales outward, exporting its good or service to non-local regions, production in the
distant market will Hkewise constrain the exporting firm's market power, even in its home mar-
ket. William M. Landes and Ricahrd A. Posner, Market Power in Antitrust Cases, 94 Harv. L.
Rev. 937, 968(1981).

Senator Thurmond. Mr. Crandall.

STATEMENT OF ROBERT W. CRANDALL

Mr. Crandall. Thank you, Mr. Chairman. It is a pleasure to be
here, Mr. Chairman and Senator Leahy. I have a prepared state-
ment that I will ask to be submitted for the record and I will just
summarize very briefly.

I have been a student of this industry for more than 20 years
and have probably published about 4 books in the last 8 or 9 years
at the Brookings Institution on the communications sector of the
economy. I must tell you, in anticipating some of your questions
and sitting and listening to others address the previous panelists,
that when you ask for predictions about how this industry is going
to shake out now that the 1996 Telecommunications Act is in place,
I think the honest answer is that we don't know.

What has happened here is that you have fundamentally shaken
up an old-line, regulated industry which was in the throes, anyway,
of major changes caused by rapidly advancing technology. Even the
experience that we have had from previously deregulated indus-
tries, I don't think, begins to suggest how dramatic the changes
will be.

The changes will be toward much greater competition because
the most important thing you have done is to eliminate a primary
barrier to competition, which was the State regulatory commis-
sion's ability to restrict entry into local and interLATA markets.
For that, I think you are to be applauded.

In addition, in the last year, the Federal Communications Com-
mission has decreed that AT&T is no longer a dominant carrier.
Whether you believe some of the assertions about how regulation
combined with other forces in the market to create an implicit car-
tel of long distances or not, there is no doubt that allowing firms
to respond more quickly to competitive thrusts, as AT&T now may
through its nondominant status, means that I think this sector of
the economy, this part of the industry, will become much more
competitive.

Prices have not yet reached their competitive equilibrium in that
sector, and a good example of that is in the following numbers.
Today, the average price above access charges for interLATA serv-
ices in the United States is probably somewhere around 11 cents.
The long distance companies are today offering their services at
wholesale to resellers at, for very large deals, somewhere between
1 and 2 cents, which may approximate what their long-run costs
are of providing that service.

The idea that the rest of that margin, 9 to 10 cents, must be ab-
sorbed by selling costs and administrative costs, I think, is one
which probably will not be sustained by the marketplace. The rea-
son why we heard so many people change suppliers each year is
a function of how high the incremental cost margin really is today.
So I think that sector of the economy will become much more com-
petitive as well.

As Mr. Huber suggested, the mergers which you are considering
today do not involve mergers of currently competing companies. To
the extent that they are competing today, it is only in a minor sort
of way. Their basic local and interLATA services are not in com-
petition with one another. Also, the question that you asked earlier
about whether the market would have shaken out as five or seven
large local companies in the absence of the MFJ in 1984, I think,
is a very good one. We simply don't know.

But what we do know is that the companies that are combining
today are not in fundamental competition with one another. As Mr.
Huber pointed out, in an antitrust case under the Clayton Act, if
they are not in competition with one another and you have to fall
back on a potential competition argument, then, as Attorney Gen-
eral Barr pointed out, you have to point out that they are uniquely
positioned to enter this market and no one else would enter, or
very few others would enter. I don't think that case can be made
at all.

Finally, let me point out that in every other industry that we
have deregulated, there has been a rush of entry, a rush of exit,
combinations, mergers that succeeded and mergers that failed
abysmally. In no case would we have predicted that things would
work as well as they did; that is, costs fell dramatically as a result
of all sorts of changes in these industries; the entry of UPS, for in-
stance, or Fed Ex into the small-parcel service that the less-than-
truckload carriers were involved in. The fact that Southwest Air-
lines became the most efficient carrier in the airlines industry
would not have been predicted ab initio.

I would conclude by saying that I see no threat from these merg-
ers, but also I don't think anybody testifying before you can tell you
how this industry is going to shake out. The fundamental fact is

competition has been enhanced by the lowering and the reduction,
if not the total elimination, of regulatory entry barriers, and I
think what we are going to see is a very competitive telecommuni-
cations sector down the road. But who the players will be, what
their market shares will be, how many local carriers we have, how
many long distance carriers we have are something that I think no-
body can predict at this point.

[The prepared statement of Mr. Crandall follows:!

Prepared Statement of Robert W. Crandall »

Mr. Chairman and members of the Committee, it is a pleasure to appear before
you today to express my views on the recent merger activity in the telephone indus-
try. My views are based on thirty years of studying market structure and competi-
tion in such diverse industries as steel, motor vehicles, communications equipment,
rubber tire, broadcasting, cable television, and telecommunications services. In the
past few years, I have been the author or co-author of two Brookings books on tele-
communications policy. After the Breakup: U.S. Telecommunications in a More Com-
petitive Era (1991); Talk is Cheap; The Promise of Regulatory Reform in North
American Telecommunications (1996, with Leonard Waverman); and Cable TV: Reg-
ulation or Competition? (1996, with Harold Furchtgott-Roth) as well as of nimierous
articles dealing with telecommunications issues. I have also served as a consultant
to numerous telecommunications companies, including the members of the U.S.
Telecommunications Association in the FCC's recent interconnection proceedings.

The recent mergers in the telephone industry are but one manifestation of a tre-
mendous upheaval in the industry. Rapid technological change and dramatic
changes in government regulatory policies have been unsettling to the estabhshed
order. One can no longer confidently discuss the future of local telephone companies,
cable television firms, or long-distance companies without realizing that each is
poised to enter the other's business and that numerous other entrants lurk on the
periphery with new wireless or satellite technologies, Change is coming in ways that
few of us, including the executives of large telephone companies, can predict.

The inevitable impact of these changes is a divergence in the views of market par-
ticipants as to the winning technologies or strategies. Some may view the large
wireline investment of local telephone companies as the source of a "first-mover" ad-
vantage while others may see this inherited plant as a lodestone around the necks
of the local companies. Those with the more bullish views will be buyers of LEC
assets — as portfolio investors or acquirers — while others may be sellers.

This year, two large mergers between Regional Bell Operating Companies have
been announced. SBC Communications has announced its intention to acquire Pa-
cific Telesis, and Bell Atlantic has announced its intention to merge with NYNEX.
Both mergers involve the combination of two, largely non-competing, local telephone
companies that have a variety of other businesses, including domestic wireless oper-
ations, a number of wireless and wire-based video operations, and international in-
vestments.

THE structure OF U.S. TELECOMMUNICATIONS MARKETS

The 1996 Telecommunications Act will have a dramatic effect on the structure of
U.S. telecommunications markets. Until this year, the Regional Bell Operating Com-
panies (RBOCs) have been barred from interLATA service markets by the AT&T de-
cree, and most states have barred entry into their local telephone markets. The
1996 Act will change all of this, entry into the local and interLATA markets will
now be open, although the RBOCs' interLATA entry requires the scaling of a few
regulatory hurdles.

The interLATA markets have become increasingly competitive, but it is likely that
prices in these markets have not yet reached a competitive equilibrium. AT&T's
share has fallen to less than 55 percent of the revenues of all long-distance carriers,
while the shares of MCI, Sprint, and LDDS Worldcom now total about 33 percent.
However, AT&T had more than 70 percent of presubscribed Unes as of December
1994. Equally important, these large carriers are now poised to enter the local and
intraLATA long-(fistance markets, using a variety of technologies and market strate-
gies.

•The views expressed herein are solely my own. They should not be taken to represent the
views of the Brookmgs Institution, its other staff members, or its Trustees.

The local exchange markets are now open to competitive entry through the con-
struction of new facilities, the leasing of the incumbent local carriers' unbundled fa-
cilities, or resale. The number of potential entrants using any of variety of such ap-
proaches is very large. Obviously, each of the four large long-distance companies is
now pursuing its own strategy for entering local markets. Each of the large cable
companies, such as TCI, Time Warner, Jones Intercable, Cablevision, or Cox loom
as major threats to incumbent telephone companies because of the existing cable
plant whose backbone is being converted rapidly to fiber optics. A large number of
smaller companies are either negotiating interconnection agreements or have signed
such agreements with the major local-exchange companies already. Three new wire-
less competitors are poised to enter each local market, having paid between $4 bil-
lion and $10 billion nationwide in recent FCC spectrum auctions. Motorola is build-
ing a network of low-orbiting satellites that will be capable of ofiiering connections
to U.S. businesses or households in the near future. Each existing local telephone
service provider — whether an RBOC or an independent company — is a potential en-
trant into all of the others' markets. In addition to the seven RBOCs, there are at
least five other local telephone companies — Alltel, Cincinnati Bell, Frontier, GTE,
and Southern New England Telephone — that could pursue such expansion. Finally,
there are a variety of other large companies, some with telecommunications invest-
ment and some without, as well as numerous foreign carriers that could enter the
market for local communications in the United States.

In short, with entry barriers lowered or removed by the 1996 Act, there is now
the potential for substantial entry into all aspects of U.S. telecommunications. Given
the rate of technical change and the possibility of exploiting joint economies in deliv-
ering of marketing a variety of communications services to the household— local te-
lephony, long-distance service, Internet connections, and video — we are about to wit-
ness the collision of very large players in the marketplace.

The two major RBOC mergers announced recently do not involve companies that
are direct competitors in local or intrastate toll markets. Rather, the two mergers
involve companies that are in adjacent territories or even farther away. Even if
these companies were potential entrants into each others' markets in the absence
of the mergers, with so many potential entrants it is difficult to see how a few merg-
ers among largely non-competing local-exchange companies could affect the vitality
of this competition.

POTENTIAL BENEFITS OF TELECOM MERGERS

When any industry is subject to the external shocks of technical change and de-
regulation, existing firms will find it necessary to adjust rapidly to meet the devel-
oping competition. The result will be a variety of new investment plans, asset write-
downs, and acquisitions. Some of these decisions will prove successfiil; others will
not. But no one can predict at this juncture what the winning strategy will be in
such a dynamic industry as telecommunications.

Indeed, no one could have predicted how even less technologically-dynamic indus-
tries, such as airlines and trucking would adjust to deregulation. In both industries,
there were large numbers of new entrants, large mergers, and a substantial number
of bankruptcies. For instance, PanAm and National Airlines merged and ended in
bankruptcy; Northwest and Republic merged and have survived by combining their
networks. Southwest has expanded successfully without acquisitions. In the LTL
trucking sector, the large carriers have pursued an aggressive acquisition strategy,
greatly reducing their operating costs, and rates as a result. Many other LTL car-
riers have been forced to exit in the face of the sharply declining rates.

In telecommunications, the pace of technical change is much more rapid than it
has been in the transportation sector. Faced with the prospects of new entry into
their core markets, the major companies must devise new strategies. MCI, AT&T
and Sprint are each beginning an assault on local markets with different strategies.
The local operating companies will have to respond by improving their efficiency,
building new facilities, and expanding their services. There is no reason to believe
that the current geographical boundaries of these companies' local service areas cre-
ate the most efficient agglomerations to offer telephone and video services. Nor is
it likely that these companies are emerging from decades of state regulation with
the most efficient structures or operations.

One way for the local carriers to improve their efficiencies and develop a variety
of services through which they can exploit joint marketing economies is through ac-
quisitions. For example, the Bell Atlantic-NYNEX merger could conceivably lead to
much more efficient operations in the New York metropolitan area or allow greater
efficiencies in marketing local telephony, long-distance service, and video services

along the east coast. These efficiencies, hke the efTiciencies obtained in the LTL
trucking mergers, would be reflected in lower rates for consumers.

Mergers also provide an opportunity for new management and a new approach
to organizing and operating firms in a changing environment. Both the SBC-Pacific
Telesis and Bell Atlantic-NYNEX mergers may provide such opportunities.

CONCLUDING COMMENTS

There is nothing about the recently-announced telecom mergers that need concern
the Congress or the antitrust enforcement agencies. Because the largest of these
mergers involve combinations of essentially non-competing firms, it is unlikely in
my view that the antitrust authorities will be able to or should be able to block
them in the courts. No one can know how the telecommunications sector will de-
velop in the next few years with deregulation and the liberalization of entry. But
with so many large players attacking one another's turf, it is difficult to see how
competition is threatened by these mergers. Congress has opened the door wide to
competition with the passage of the 1996 Act. A few large mergers will not even
begin to close it and may open it even wider.

Senator THURMOND. There is a vote in the Senate. We will have
to take a recess for about 10 minutes and we will be back at that
time.

Senator Leahy. Mr. Chairman?

Senator THURMOND. Senator Leahy.

Senator Leahy. Mr. Chairman, I am not sure whether I will be
able to get back, but if I don't

Senator THURMOND. Would you like to go ahead now?

Senator Leahy. I wonder if I might just ask one question now,
but then submit the rest for the record.

Senator THURMOND. Senator Leahy will ask questions. I will go
and vote and come back.

Senator Leahy. I was just thinking that Mr. Ebbers said in the
earlier panel that neither WorldCom nor MFS is the incumbent
monopoly or former monopoly. Both have market share in the sin-
gle digits. He said a merger between the two companies would be
a big yawn in terms of antitrust issues. Do you agree with that?

Mr. Crandall. Are you asking

Senator Leahy. Any one of you. Mr. Crandall?

Mr. Crandall. I think Mr. Huber said it would be a big yawn
in terms of antitrust issues. I don't think having been a former mo-
nopolist is a criterion for being a fighting tiger. The fact that these
two firms are former monopolists probably means that they have
been spared the necessity of having to respond to competition and
be as fighting mean and lean as they otherwise would be. I think
I would rather go up against former monopolists.

Senator Leahy. You are not saying that WorldCom or MFS are
former monopolists, are you?

Mr. Crandall. No. I am saying that the mere fact that the re-
gional Bell operating companies or their antecedent company,
AT&T, were monopolists at some point in history because of regu-
latory protection does not make them such formidable opponents;
quite the contrary.

Senator Leahy. In trying to make it easier for the home viewers,
we have now the Senator who actually is a man with a full head
of hair, but he apes my hairline, Senator Simpson, who has come
here to fill in to keep the continuity going, and we will correct the
record on that part afterwards. [Laughter.]

Senator Simpson [presiding]. I think we should correct it right
now.

Patrick, I have not voted because I have been rambHng around.
I believe that the testimony hasn't even been completed here. It is
one of those days as we drawn down to the end, but I have a state-
ment and it will be inserted into the record as if read in full.

[The prepared statement of Senator Simpson follows:]

Prkfarkd Statement of Senator Aij\n K. Simeon, a U.S. Senator From the

State of Wyoming

First, I want to address my good friends Senator Hatch and Senator Thurmond
and commend both of you for scheduling the hearing to examine the issue of com-
petition in the telecommunication industry. Although this is a full committee hear-
ing, its subject matter is clearly antitrust and I wanted to come by today — in what
is likely to be my last antitrust hearing in the Senate — 16 say a few words of tribute
to the man who urged me to serve on this committee nearly 18 years ago. He is
my loyal friend, mentor, and always the "Chairman," Senator Strom Thurmond.
Strom, you have been an inspiration to me and to so many other colleagues because
of your integrity, your commitment to principles, your unparalleled political acumen,
your physical vitality, and for your great devotion to public service. You will have
seen two Simpsons come and go through here and for the benefit of others who will
follow me, I hope that you will remain here to provide them with the kind of leader-
ship and friendship that you always showed my father and have always shown me.

I think we would all agree that one of the most historic achievements of the 104th
Congress was enactment of the Telecommunications Act of 1996. Our goals were to
increase competition, to create new job opportunities, and to provide better products
and services for the consumer at better prices.

In simple terms, we seek to change the face of the local exchange marketplace
and increase competition in the long distance field. These are ambitious goals that
have been many years in the making and I strongly believe we need to do all we
can now to ensure that the Telecommunications Act, as implemented, has the best
chance to achieve these goals.

The announcements of proposed mergers between certain Bell companies come at
a time when we are still at the earliest stages of determining how best to implement
this act, and how we can achieve the greatest benefits from enhanced competition.

I am not here to advocate that our committee should micromanage the proposed
mergers. I do believe, however, that at this critical time of policy implementation,
we have a duty in our oversight capacity on "antitrust, business rights, and competi-
tion," to examine whether industry consolidation will promote or hinder the primary
goal of the act — that is, to foster real competition in the telecommunications indus-
try.

There has been such a remarkable growth in the long distance market over the
past 10 years that today— although three companies still dominate the market —
hundreds of new companies are entering and competing for customers. Long dis-
tance rates have fallen and consumers are being offered better products and more
responsive service. Today, Wyoming consumers have a choice between 15 long dis-
tance carriers — something that was unheard of 10 years ^go. The new telecommuni-
cations law should enable them to eventually benefit from similar competition in the
local service market.

The Telecommunications Act will provide opportunities for small companies to
compete for both long distance and local service markets in States like Wyoming.
I voted in favor of this legislation precisely because I felt it would promote competi-
tive pricing and enthusiastic and competent service, not only for my constituents,
but for every "Joe six-pack" American, who today is forced to buy local service from
a monopolistic provider.

I have not had an opportunity to review either of the merger proposals that are
under such intense consideration by the industry and by State public service com-
missions, so I do not want to explore or comment on their merits here. Instead, I
will simply impart to you my firm belief in the goals of the Telecommunications Act
and my sincere interest in seeing them become a reality. We must follow through
on our commitment to allow market entry and real competition so small businesses
can offer services people not only want, but that they choose. In order to create jobs,
improve systems, increase competitiveness, and lower prices, we must keep a vigi-
lant watch to ensure that we are moving steadily away from monopolistic condi-
tions — never toward them.

I thank Senator Hatch and Senator Thurmond for the opportunity to make these
remarks. And 1 thank all of the witnesses who took time to be here to present their

testimonies today. Unfortunately, I have a scheduling conflict and must excuse my-
self, but I will be carefully reviewing the record.

Senator SIMPSON. I said to all the industry, I remember, when
all of this started — all the industries; I remember all of them — I
said something to the effect I hope that you can eventually work
this out among yourselves because if you drag it in here, we will
do it, but it won't be done right. And they all laughed, you know;
well, we need to have it come to Congress.

It is my experience in 18 years here that you would have done
a lot better if you had all just gotten together because we will do
it and we will keep doing it and the theme will be, you know, to
bust up monopolistic practices and let everybody in, take everybody
and put them in a black burlap sack and shake them up and let
them claw each other's eyeballs out. The fire alarm people will be
doing cable television and the cable television people will be doing,
I don't know, left-handed elbow fiber optic cubes, and that is what
is going to happen simply because we don't have time to under-
stand the tremendous complexity and intricacies of the businesses.
And nobody feels sorry for anybody because everybody is making
a wad. At least that is the way the American public looks at it.

What are we doing with these huge entities, all of them remark-
able American corporations, all of them the epitome of capitalism?
What are we doing? So I won't be here next year, but I can assure
you that as I see the theme of it, it will be to just continue to try
to see that everything is opened up in a way that is best for one
single person, and that is the consumer.

I know you all say continually that that is the great desire, but
sometimes it is not. It comes down to things like greed and squeez-
ing out somebody else, and if you are bigger, we are going to try
to prevail to get bigger yet. Anyway, competition is the theme and
I hope we can do it in a way — I haven't reviewed either of the
merger proposals that are under intense consideration and I don't
want to comment or explore the merits here, but simply say my
firm belief is in the goals of the act that we tried so hard to do cor-
rectly, that it becomes reality, that we follow through on the com-
mitment to allow market entry at all levels, real competition at all
levels, so the little gi^ys in the small business can offer services,
and people want those services, but that they are able to choose
those services in order to create jobs and improve systems and in-
crease competitiveness and lower prices, and keep a vigilant watch
to ensure we are moving steadily away from monopolistic condi-
tions and never toward them.

So, with that theme, as I say, I remember when it all started,
and Lord knows you have been through an anguishing time. I hope
we can do it right, but don't expect that it will ever really be done
right here in the legislative arena because of the obvious complex-
ities and the need for regulatory reform and control, and so on.
Now, with that ringing little tidbit, I must press on to go vote. I
was stalling, and no one is here. [Laughter.]

Senator Thurmond said he would be back, so we are going to
have to recess for a few minutes, if you will please do that, and
thank you for the opportunity of making some remarks. I am sorry
about the situation. We will recess until the return of the Chair.

[Recess.]

Senator Thurmond. The committee will come to order.
Mr. Binz, I don't believe you have made an opening statement
yet, have you? So you go right ahead for 5 minutes.

STATEMENT OF RONALD BINZ

Mr. BiNZ. Thank you, sir. Mr. Chairman, my name is Ronald
Binz and I am president of the Competition Policy Institute. CPI
is a nonprofit organization which advocates State and Federal poli-
cies to bring competition to energy and telecommunications mar-
kets in ways that will benefit consumers. CPI was established in
March of this year and received its initial funding from a group of
new entrants into the telecommunications markets. We develop our
policy positions independent of the funding sources and in consulta-
tion with an advisory board of consumer advocates from around the
country.

We applaud the committee for holding this hearing to consider
the effect which mergers in the telecommunications industry will
have on competition and consumers. We are deeply concerned
about the rapid consolidation of major players in the telecommuni-
cations marketplace and very much appreciate the opportunity to
appear before the committee today.

The Telecommunications Act of 1996 was a landmark act and it
was passed by the Senate and House in overwhelming majorities
this year because it contained a balance between deregulation and
competition. Loser ownership restrictions were accompanied by
strong measures to enable and encourage the growth of competition
in all telecommunications markets. Unfortunately, the mergers of
several key industry players may upset this balance and harm both
the interests of competition and consumers.

Mr. Chairman, I would like to make three points in this testi-
mony. First, the FCC and the States are working hard to adopt
rules necessary to implement the Telecommunications Act of 1996,
but progress toward local exchange competition has just begun.
Local exchange competition is pretty much still just a theory and
it is far too early to conclude whether it will develop in all markets.

As you know, the FCC order just issued which implements the
local competition sections of the act was just recently issued by the
FCC. Negotiations among carriers have begun, but most negotia-
tions have ended in stalemates and are being referred to State
commissions for arbitration. Thus, while competition is permitted
in theory, I do not know of a single residential customer in the
country that has a choice for local service providers. Most small-
business customers do not have a choice for local telephone service.
I think we have been lulled into the impression here by these first
few panels that local competition is rampant. It is not yet.

It is also troubling that, one by one, the large incumbent local
exchange companies have announced their intention to appeal the
FCC's new rules. Unfortunately, any momentum gained by the
prompt action of the FCC in response to the aggressive deadlines
set by Congress will be lost if the companies succeed in obtaining
a stay of that decision in court.

My second point is the procompetitive effects of the act may be
jeopardized by the consolidation of large telecommunications car-
riers. Simply put, mergers remove potential competitors from mar-

kets which have just been opened to competition. Some pending
mergers create stronger monopolies, having greater resources with
which to thwart potential competitors.

Since the passage of the 1996 act, the concentration of ownership
in the industry is proceeding much faster than the growth of com-
petition. If consolidation continues to outstrip the growth of com-
petition, the goals that Congress endorsed in the 1996 act may not
be achieved. Consumers may end up with higher rates and fewer
competitive choices.

My third and final point is the announced mergers of the re-
gional Bell operating companies are especially menacing to the fu-
ture of local exchange competition. We recommend two measures
designed to mitigate the harm to consumers and to competition.
First, these mergers should be considered only after the FCC has
certified that the companies have met the competitive checklist in
the Telecommunications Act for each of the States in which they
operate today.

Second, regulators should require that the claimed benefits of the
merger flow through to consumers in the form of lower rates. If
compliance with the checklist is a precondition to considering these
mergers, it is much more likely that competition will develop in
local markets and that the damage to competition from the merg-
ers will be mitigated. Importantly, this can be achieved without im-
posing additional requirements on the RBOC's beyond those al-
ready present in the 1996 act.

While mergers are often justified by claims of cost savings from
increased efficiencies, consumers may never see those savings.
When considering whether to permit the mergers, regulators
should require that the promised benefits result in lower rates to
consumers. However, regulators should not trade short-term bene-
fits for the long-term damage to the development of competition
which some of these mergers might cause.

The goals of the Telecommunications Act were correct, to pro-
mote a more competitive deregulatory marketplace for goods and
services. Policymakers should ensure that the RBOC's take effec-
tive steps to enable competition for local services in each and every
State they serve, and ensure that consumers actually benefit from
the cost savings.

Once again, Mr. Chairman, thank you for conducting this hear-
ing on this important matter and for the opportunity to testify.

[The prepared statement of Mr. Binz follows:]

Prepared Statement of Ronald Binz

Mr. Chairman and Members of the Committee, my name is Ronald Binz, and I
am President of the Competition Policy Institute. The Competition Policy Institute
(CPI) is a non-profit organization which advocates state and federal policies to bring
competition to telecommunications and energy markets in ways that benefit con-
sumers. CPI was created in March of this year and has participated in proceedings
before the Federal Communications Commission (FCC), the State-Federal Joint
Board on Universal Service and state regulators.

CPI applauds the Committee for holding this hearing to consider the effect which
mergers in the telecommunications marketplace will have on competition and con-
sumers. We are deeply concerned about the rapid consolidation of major players in
the telecommunications marketplace.

The landmark Telecommunications Act of 1996 passed the Senate and the House
by overwhelming majorities earlier this year because the Act contained the right
balance between deregulation and competition. The substantial loosening of owner-

ship regulations contained in that legislation was accompanied by equally strong
measures to allow the growth of competition. Unfortunately, the mergers of several
key industry players has tipped the balance against the interests of competition and
consumers. Since passage of the 1996 act, the concentration of ownership in the
telecommunications industry is proceeding much faster than the growth of competi-
tion. If this industry consolidation is allowed to continue unchecked, the pro-com-
petitive goals that Congress endorsed in the 1996 act may not be achieved, and con-
sumers may end up with higher rates and poorer service quality.

In the testimony that follows, I will discuss some current events in telecommuni-
cations which lead me to the following conclusions:

The FCC and the states are working hard to adopt the rules necessary to imple-
ment the Telecommunications Act of 1996, but progress toward local exchange com-
petition has just begun. It is far too early to conclude whether competition will de-
velop in all telecommunications markets.

The pro-competitive effects of the Telecommunications Act of 1996 may be jeop-
ardized by the consohdation of large telecommunications carriers. Simply put, merg-
ers remove potential competitors from markets which have just been opened to com-
petition and some of them create larger monopolies that have greater resources with
which to thwart potential competitors.

Mergers of telecommunications carriers will have potential cost and potential ben-
efits for consumers. Regulators and policy-makers must take affirmative steps to
minimize the cost and ensure that consumers benefit. Regulators must be particu-
larly careful of the effect of any merger on competition. Any short-run benefits such
as cost efficiencies will be dwarfed by the long-run damage to consumers if the de-
velopment of competition is stymied by such mergers.

The announced mergers of the Regional Bell Operating Companies (RBOCs), Bell
Atlantic-NYNEX and SBC-Pacific Telesis, are especially menacing for the future of
local exchange competition. These mergers should be considered only after the com-
panies have met the "competitive checklist" contained in the Telecommunications
Act of 1996 for each of the states in which they operate today.

I. STATUS OF LOCAL COMPETITION

The efTect of the legislation on the development of competition for local telephone
service is just beginning to be felt. The FCC just last month released its initial set
of rules governing how competitors may interconnect with the networks of the in-
cumbent local telephone companies. Not surprisingly, several of the incumbent tele-
phone companies have petitioned to stay and overturn the new rules. GTE, one of
the largest telephone companies, has asked to be treated as a rural telephone com-
pany so that it can be exempted from the new unbundling rules.

In the meantime, states are considering their own rules to implement the 1996
Act. Most states have waited until the FCC published its rules before moving for-
ward.

Pursuant to Section 251 of the Telecommunications Act of 1996, competitors to
the incumbent local telephone companies must first engage in negotiations with the
incumbent telephone companies before they can take advantage of the new rules.
If the parties to these negotiations do not reach agreement, and, to date, many of
them have not, the parties must petition the State regulatory officials to arbitrate
any contested issues. Many of these arbitration decisions are expected in October
and November. Under the 1996 Act, either party to the negotiations may then chal-
lenge these arbitration decisions in federal court.

Competitors to the incumbent telephone companies are growing but are far small-
er than the incumbent telephone companies. According to one industry analyst, com-
petitors to the local telephone companies earned about $1.3 billion in revenues in
1995, which is less than 1% of the total market for local telephone service.

Of course, another way to judge the scope of competition for local telephone serv-
ice is to examine the consumer perspective. Frankly, I do not know of one residen-
tial consumer who has a choice among alternative providers of local telephone serv-
ice today.

II. CONSOLIDATION IN THE COMMUNICATIONS MARKETPLACE

While competition is developing slowly, virtually every sector of the communica-
tions marketplace has seen substantial consolidation. In the broadcast field, Wes-
tinghouse acquired CBS; Disney acquired CapCities/ABC, and Fox acquired New
World in multi-billion dollar transactions. Hundreds of radio stations have changed
hands in transactions totaling hundreds of millions of dollars. In the cable industry,
Time Warner is about to take control over Turner Broadcasting System for $7.5 bil-

lion, creating the largest media company in the world. Continental CableVision, the
third largest cable operator, is being acquired by USWest for $10.2 billion.

The increasing concentration of ownership in the media raise significant questions
about whether American consumers are receiving a diversity of views, or whether
their information will be subjected to excessive control by a few corporations. These
mergers also raise questions about the ability of independent voices to obtain access
to the marketplace of ideas. And, finally, these media mergers raise competitive con-
cerns about the ability of small broadcasters and independent programmers to com-
pete in a highly-concentrated marketplace. CPI urges Congress to take a closer look
at these issues in future hearings.

III. ANALYSIS OF THE MERGERS OF TELECOMMUNICATIONS CARRIERS

Of all the mergers announced to date, the biggest mergers by far are those of Bell
Atlantic and NYNEX, on the one hand, and SBC and Pacific Telesis on the other.
If the mergers are permitted to go forward, both corporations will become two of
the top corporations in the country and in the world.

The other significant merger in the telecommunications industry is the proposed
merger of LDDS WorldCom, the fourth largest long distance company, and MFS
Communications, the largest competitive access competitor to the incumbent local
telephone companies.

CPI believes that the potential costs and benefits of each merger must be ana-
lyzed on a case-by-case basis. CPI does not believe that mergers in the telecommuni-
cations industry are necessarily harmful to consumers and competition. The follow-
ing discussion presents an analysis of several of the factors that Congress may use
to assess the impact of these mergers on competition and consumers.

1. Efficiencies

All of the major players involved in the mergers assert that the mergers of their
companies will help them to reduce their costs and will make them stronger finan-
cially. For instance, Bell Atlantic estimates cost savings of at least $600 million an-
nually. Most analysts agree that Pacific Telesis (PacTel) has been weakened by the
spin-off of its cellular business and its reduction of intraLATA toll rates. The ana-
lysts generally agree that PacTel could benefit from its alliance with SBC, one of
the strongest RBOCs.

If true, these costs savings and stronger financial backing would be beneficial to
the companies. CPI is reluctant to second-guess the business judgments of the prin-
cipals in these companies concerning whether these mergers are good for the compa-
nies. I would only note that some mergers have provided to be beneficial to the com-
panies, while others, such as AT&T's acquisition of NCR, have not.

The important question for policy-makers, however, is not whether these mergers
will benefit the companies, but whether the mergers will benefit consumers. If the
mergers were necessary to keep the failing companies afloat so that consumers
could continue to receive telephone service, the mergers would undoubtedly be bene-
ficial for consumers. Consumers would also benefit if the cost efficiencies were
flowed through to ratepayers in the form of lower rates for basic telephone services.

At most, however, the companies argue that the mergers will put them in a
stronger financial position as they face increasing competition. CPI questions wheth-
er stronger, larger companies, particularly companies with monopoly power over
local telephone service, wall mean better service and lower rates for consumers, or
simply greater profits for the principals and the shareholders.

2. Jobs

SBC-PacTel claim that the merger will result in over 1,000 new jobs in California,
while Bell Atlantic-NYNEX assert that the merger may result in the loss of 3,000
administrative and management jobs, but no loss of blue collar jobs. It is not clear
at this point whether the LDDS-MFS merger will create more jobs or lead to fewer
jobs for the merged company.

It is ironic, to say the least, that the RBOCs would make these claims concerning
jobs at the same time that they claim that the mergers will produce cost savings.
Labor costs are one of the biggest operating costs of these companies. It is also of
interest that the Communications Workers Association opposes these mergers due
in part to its concerns about the effect on their union jobs. And while SBC-PacTel
claim that they will add 1,000 jobs to California, it should be noted that SBC and
PacTel have cut a total of about 11,000 jobs over the past few years.

Even though the loss of every job is important, policy-makers need to look at the
effect on jobs in relation to the entire industry. According to Business Week maga-
zine, AT&T and the RBOCs have cut about 250,000 jobs since the divestiture. Many
of these jobs losses have been absorbed by increasing employment in other sectors

of the communications industry. In fact, according to Business Week, total industry
employment has risen by 54,000 over the past two years alone, and the converging
world of communications, computers, and entertainment has generated 400,000 new
jobs in the past year, about 20% of the total new jobs in the economy.

3. Loss of a competitor

All three of these mergers will result in the loss of a potential competitor for local
telephone service. Most analysts, and I suspect, most Members of Congress, as-
sumed that the seven RBOC's would begin to invade each others' markets and com-
pete with each other for local telephone service once the Telecommunications Act
removed the barriers to competition. In fact, this expectation is explicit in the manu-
facturing section of the legislation which prohibits any RBOC from manufacturing
in conjunction with another RBOC. (47 U.S.C. 273(a)) Similarly, it was assumed
that LDDS would also begin to compete for local telephone service, and MFS was
already a competitor. From this perspective, all three of the proposed mergers have
a negative influence on the number of competitors.

But, it is not enough simply to examine the number of potential competitors. The
analysis should also include an evaluation of the likely success that each of these
competitors would have had on the market. While LDDS and MFS certainly have
the desire to compete with the incumbent telephone companies, their actual ability
to do so as separate entities is uncertain. As mentioned earlier, the rules of local
competition are just being developed, and MFS and LDDS are relatively small com-
panies compared to the RBOC's. While MFS has been providing competitive access
service for the past few years, neither MFS nor LDDS has been providing basic local
telephone service. Thus, while the LDDS-MFS merger reduces the number of poten-
tial competitors by one, it may not reduce the quality of the competition. In fact,
there is an argument that the merger could strengthen the company's ability to
compete for local service by providing greater revenues and greater amounts of in-
vestment capital.

With regard to the RBOC's, the obverse may be the case. RBOC's certainly have
the financial ability to compete with each other; it is their desire to compete that
is somewhat in question. The RBOC's have extensive experience in proxnding local
exchange service and enormous revenues streams. The RBOC's average about $14
billion in annual revenues. They have the economic and poUtical know-how to enter
new markets, as they have shown with their extensive international investments.

The RBOC's already compete with each other for some services. Many of the
RBOCs' cellular subsidiaries already compete with each other, as oftentimes both
cellular licenses in a market are owned by an RBOC. USWest has applied to provide
competitive telephone service to BellSouth in Atlanta, for instance. Bell Atlantic and
NYNEX have already announced plans to provide long distance service outside of
their regions, and NYNEX recently received approval from the California Public
Utilities Commission to provide competitive long distance service as a reseller in
that state.

At the same time, the RBOC's have also shown an inclination to join forces rather
than compete. For instance, Bell Atlantic and NYNEX merged their cellular oper-
ations a few years ago, and these same cellular subsidiaries joined a consortium
with USWest in an effort to provide seamless, nationwide mobile communications
services in 1994. Bell Atlantic, NYNEX and Pacific Telesis have also joined to form
TEhE-TV, a new company intending to provide educational and entertainment pro-
gramming over their "wireless cable" systems. SBC joined with Ameritech,
BellSouth and the Disney Corporation in 1994 to create a similar programming en-
tity.

It is difficult to predict at this time how strongly the RBOC's would compete with
each other for local telephone service in the future if not for these mergers. Bell At-
lantic and NYNEX would have been considered prime competitors because of their
common interest in the New York City metropolitan market which adjoins the Bell
Atlantic region in New Jersey. SBC ovms cellular licenses in California, which
could, at some point in the future, be used to compete with Pacific Telesis. Many
observers believe that the future development of the market would have driven
these companies to compete with each other in the future even if they did not have
plans to compete at this time. But one point is certain — if these mergers are per-
mitted, two of the most powerful, potential competitors will be removed from the
marketplace.

In sum, while all three of the mergers reduce the number of potential competitors,
the RBOC mergers would appear to create a threat to competition by eliminating
from the competitive market two of the biggest potential competitors in terms of size
and expertise in providing local telephone service.

4. Market power

One of the most fundamental differences between the LLDS-MFS merger and the
RBOC mergers concerns their market power. Neither MFS nor LDDS have any le-
verage over the local telephone market or the long distance market. While MFS is
the largest of the existing competitors for local telephone service, it has only about
$600 million in annual revenues and is fighting to gain 1% of the market for local
service. LDDS is the fourth largest long distance company, but it has less than 59f
of the long distance market.

By contrast, the RBOC's having virtually 99% of the market for local telephone
service where they provide service, and the RBOCs on average take in about $11
billion in annual revenues from their telephone services alone (not including their
non-telephone business). The RBOCs are regulated both by the FCC and by their
respective state commissions because they face so little competition that regulators
must ensure that rates are kept at reasonable levels.

In short, the RBOCs have monopoly, or market power for local telephone service;
LDDS and MFS do not. This alone presents a significant difference between the
mergers for policy-makers. There is no possibility that the merger will allow LDDS
to raise rates for its services or to thwart competition because consumers of LDDS
services can turn to other providers to obtain lower rates. The RBOC mergers, on
the other hand, strengthen the companies that already have a monopoly, or market,
power over telephone service. If the RBOC mergers are permitted, strong action by
federal and state policy-makers, becomes even more important in order to ensure
that consumers do not suffer from higher rates as a result of the RBOC merger.

5. Size

The RBOC mergers would create two enormous entities. Bell Atlantic-NYNEX
will have over $18 billion in annual revenues; SBC will have over $21 billion. The
two companies will be the second and third largest telecommunications firms in the
U.S., slightly behind AT&T. Before the Bell Atlantic-NYNEX announcement, ana-
lysts believed that the SBC-PacTel merger would be the fourth largest merger in
the entire history of the U.S. The Bell Atlantic-NTfNEX merger is even bigger. Now
that AT&T has divested it manufacturing and computer operations. Bell Atlantic-
NYNEX is almost as large as AT&T. Time Warner, which will become the largest
media company in the world once it completes its acquisition of Turner Broadcast-
ing, Inc., will still be smaller than either of the two merged companies, as wdll TCI,
the supposed "giant" of the cable industry. The two merged RBOC's companies will
each be approximately twice as large as MCI and Sprint, the second and third larg-
est long distance carriers.

The sheer size of these new combined corporations is a concern for several rea-
sons. First, it wdll make it more difficult for regulators to determine whether the
company is engaging in cross-subsidization or other forms of improper cost-shifting.
For example, one reason for breaking up AT&T in 1984 was that FCC officials testi-
fied that AT&T was so large that they could not prevent AT&T from engaging in
cross-subsidization to keep out competitors.

Second, the added revenues means that the incumbent telephone companies have
a greater potential to engage in predatory, below-cost pricing. When a monopolist
faces the beginning of competition, a logical strategy is to lower its prices for com-
petitive services below its costs. The monopolist may find that it is profitable to
price certain services below cost in order to keep the competitor from growing and
preserve its monopoly over other services. The monopolist can only afford to lose
money on these few competitive services, however, if it is making enough money on
its other, monopoly services to overcome the revenue shortfall from the competitive
services. The larger the company is, the longer it can engage in such predatory pric-
ing without suffering harm. It is also important to realize that the monopolist has
incentives to engage in this behavior even if it is under some form of price regula-
tion.

6. Jurisdictional issues

Another source of concerns about the mergers lies in the awkward Unes of juris-
dictional authority over the companies. In general, the FCC regulates the interstate
portion of the carrier's business, while the states regulate the intrastate operations.
States control about 75% of the total capital investment made by the telephone com-
panies. By involving more states in the regulatory process for each of the merged
companies, the mergers increase the difficulty that each state commission will have
in reviewing the activities of the new, larger company. For instance, officials in the
14 states that must review the operations of USWest frequently note that the juris-
dictional complexities can, as a practical matter, render regulatory review so dif-
ficult as to be ineffective. The merger of Bell Atlantic-NYNEX in particular en-

hances this concern because the merger will efiectively double the number of states
that will have the jurisdiction over the new entity.

7. Conclusion of the merger analysis

In conclusion, the RBOC merger, if permitted to go through, would appear to pose
significant threats to the achievement of the goal of Congress to promote competi-
tion for local exchange telephone service. The LDDS-MFS merger, on the other
hand, does not appear to raise the same level of concerns.

The benefits of the RBOC mergers in terms of cost savings are speculative, and
in any case, may not be reflected in lower rates to consumers. The effect of these
mergers on jobs is likely to be small in relation to the growth of jobs in the commu-
nications market as a whole. All three of the mergers remove one potential competi-
tor in the market for local telephone service, but the two RBOC mergers each elimi-
nate a stronger and more experienced potential competitor. The two RBOC mergers
strengthen companies that already have market power over local telephone service,
makes them into two of the largest corporations in the U.S. and the world, and
makes state regulation of their activities more difficvilt. The combination of size and
market power wdll give the merged RBOC's additional means with which to forestall
competition with no assurance that any of the purported benefits of the mergers will
be flowed through to consumers.

rv. SAFEGUARDS

For all the above reasons, CPI believes that the proposed mergers of the RBOC's
should not be permitted to go forward unless, at a minimum, additional measures
are taken to develop competition and protect consumers. CPI suggests that policy-
makers should impose the following conditions before considering whether the merg-
ers should be approved.

a. Require each RBOC to satisfy the competitive checklist in each state in its region
before the merger can be considered for approval

As discussed above, the RBOC mergers are premature because they tip the bal-
ance in favor of concentration of ownership before competition for local telephone
service has begun to be effective. In other words, these mergers increase the risk
that competition will not develop for local telephone service. This risk should be
counter-balanced by measures to make competition more likely for all consumers.

One way to restore the balance is to require the RBOC's to satisfy the checklist
in Section 271 of the Telecommunications Act of 1996 in every state in its region
before the merger can be considered for approval. Section 27 1 of the Telecommuni-
cations Act requires that each RBOC must open and unbundle its network to com-
petitors for local telephone service in a state before being allowed to provide long
distance service in that state. The Act does not require each RBOC to satisfy the
Section 271 checklist in each state, however; the RBOC could choose to forgo the
opportunity for long distance entry in a state if it believes that it vdll lose more rev-
enues as a result of opening its local market to competition than it would gain from
providing long distance service. For instance, while NYNEX is likely to attempt to
satisfy the Section 271 checklist right away for the State of New York, it may not
devote the resources necessary to satisfy the checklist in New Hampshire as quickly.
Reqviiring the RBOC's to satisfy the Section 271 checklist in every state would force
NYNEX to satisfy the checklist in each of its seven states, and Bell Atlantic in each
of its territories (6 states and D.C.).

Requiring the carriers to unbundle their networks in all their states helps to pro-
tect against several of the dangers identified earlier. For instance, it woiild not be
as easy for the combined companies to avoid state regulation if they face competi-
tion in all jurisdictions. Indeed, greater competition will reduce the need for state
regulation. Similarly, it is more difficult for the carriers to price services below their
costs in a competitive area, and make up the lost profits through higher prices in
non-competitive markets, if every market faces potential competition.

It is important to note that this suggestion does not involve increasing the pre-
conditions that the RBOC's must meet before they can provide long distance service.
The Federal legislation specifically says that the FCC may not increase or expand
the items contained in the checklist, and this proposal does not add to these long
distance preconditions. CPI's suggestion relates to the merger applications, not the
long distance applications. For instance, NYTvTEX might satisfy the checklist in New
York and be able to originate long distance service in New York but may not be
allowed to merge with Bell Atlantic if it has not complied with the checklist in the
other states. In the alternative, NYNEX might meet the preconditions for the merg-
er by satisfying the Section 271 checklist in each state, but may not yet provide long

distance service if, for instance, it fails to meet the "public interest test" under the
legislation.

By requiring each of the four RBOC's to satisfy the Section 27 1 checklist in each
state, the regulator would not have to make a determination of the carrier's market
share or market power. Nor would this suggestion involve policy-makers in inter-
preting a new set of standards. Instead, this suggestion woufd rely upon the check-
list already included in the legislation enacted by Congress. This pre-condition
would simply rely upon the same decision that the FCC must already make under
the legislation. As a result, this standard would not involve any increase in adminis-
trative resources by the FCC, by the States, by the Department of Justice, or by
the carriers.

Finally, the carriers themselves have announced that they plan to meet the check-
list requirements. The RBOC's supported passage of the legislation and are plan-
ning to comply with the checklist requirements, so the proposal would not impose
any additional burden upon them. The pre-condition of ensuring that the RBOC's
meet the Section 271 checklist is simply an added safeguard to ensure that the
merged entity does its part to allow competition to develop in every state in their
service areas.

Requiring the RBOC's to satisfy the Section 271 checklist in each state does not
guarantee that competition will emerge in each state. Such a requirement, however,
might increase the likelihood that competition would develop sufficient to offset the
dangers to competition that the merger would create.

b. Require the RBOC to flow through to consumers any benefits received fi-om operat-

ing efficiencies

As noted, the mergers could make it more difficult for regulators to determine
whether the carriers are pricing their services according to their costs. The jurisdic-
tional questions, as well as the doubling in size of the companies, will make regula-
tion more difficult. These problems could make it easier for the carriers to charge
rates to consiuners that are higher than they would be otherwise.

One way to address this potential problem is to require the carriers to reduce
their rates according to the amount of efficiencies they can expect will occur from
the merger. Both carriers allege that the merger will make them more efficient and
reduce their costs. It seems reasonable that regulators should require that the bene-
fits of these efficiencies should flow through to consumers in the form of lower rates
for service.

Unfortunately, it is unlikely that the carriers will flow through these savings to
consumers unless regulators make such a cut in rates an explicit part of their ap-
proval process. Most states have implemented some form of price cap regulation
that does not require the prices for service to be based directly on their costs. In
other words, if carriers reduce their costs, they do not have to lower their prices
to consumers. Regulators must take specific action to ensure that consumers benefit
from the cost reductions achieved by the carriers as a result of the mergers.

c. Additional safeguards

CPI bases these conclusions on the information concerning the mergers that is
available at this point in time. Several regulatory agencies are reviewing these
mergers, including the Department of Justice, the FCC, and certain state regulatory
commissions. It is possible that further information concerning these mergers will
arise in the course of those proceedings. CPI will monitor these investigations to de-
termine whether additional action may or may not be necessary.

V. CONCLUSION

CPI understands that U.S. companies must prepare to meet the challenges of the
21st Century. The markets for telephone services, entertainment services, computer
services are converging. Many of these companies believe that they need to prepare
for the fiiture by aggregating products and services so that they may provide "one-
stop shopping" to consumers. CPI understands and is not opposed to the desire of
companies to provide one-stop shopping and other consumer services. CPI simply
urges this Committee and other policy-makers to make certain that consumers can
choose from several competing providers, each of whom is able to sell services both
individually and as part of a package. CPI believes that the goals of the Tele-
communications Act were correct — to promote a more competitive, deregulatory
marketplace for telecommunications goods and services. Recent developments, and
in particular the proposed mergers between several of the RBOCs, threaten the
achievement of those goals. Before allowing these mergers to go forward, policy-
makers should take steps to ensure that the RBOCs take more effective steps to
promote competition for local telephone services and to ensure that consumers bene-

fit from at least some of the cost savings that these mergers are intended to
produce.

Senator Thurmond. Mr. Hatfield.

STATEMENT OF DALE N. HATFIELD

Mr. Hatfield. Thank you, Mr. Chairman. I appreciate the oppor-
tunity to testify before you today on the subject of mergers and
competition in the communications industry. I have already sub-
mitted written testimony, and in accordance with your instructions
I will only summarize that testimony here this afternoon.

Let me begin by stating for the record that while my firm has
done some work for the incumbent LECs from time to time, we also
have done quite a bit of work for long distance carriers and others
who seek to compete in the local market.

In my testimony here today, I will focus on two areas; one, my
concerns about the prospects for robust competition in the provision
of local telephone service; and, two, given those concerns, the public
interest implications of the proposed mergers between Bell Atlantic
and NYNEX and between SBC and PacTel.

Over the past 25 years or so, of course, competition has been suc-
cessfully introduced in the customer premises equipment and long
distance portions of the communications marketplace. Competition
in the local telephone segment, of course, was held back by a com-
bination of factors, including legal barriers to entry and the mas-
sive size of the initial investments required to duplicate the exist-
ing local exchange network. Thus, despite local telephone pre-
dictions to the contrary, the degree of local competition has re-
mained trivial.

In passing the Telecommunications Act of 1996, of course, this
Congress took critical steps to facilitate the development of com-
petition in the provision of local services. It did so by affirming the
policy of relying upon competition in communications generally,
and more specifically by legislating against statutory and regu-
latory barriers to entry, by establishing the legislative groundwork
for economical and nondiscriminatory interconnection agreements
and, among other things, legislating against unnecessary and un-
fair unbundling and resale restrictions.

Recently, of course, as we have heard, the FCC took important
steps to achieve the procompetitive goals of the act. But despite
these critical steps by the Congress and the FCC, I continue to
have strong reservations about whether robust competition, with
multiple facilities-based providers of local service, will actually de-
velop. My reservations stem from two things.

First, I am concerned that unlike the situation in long distance
and equipment manufacturing sectors of the market following di-
vestiture, the Bell operating companies have a strong incentive to
impede competition in their core market, the provision of local ex-
change and exchange access services.

Second, while striking down statutory and regulatory restrictions
and eliminating or reducing other barriers to entry — while these
are necessary conditions, they may not be sufficient to ensure the
development of robust local competition. They may not be sufficient
because of the enormous cost of creating multiple local communica-

tions networks and the high risks associated with gaining sufficient
market penetration to achieve reasonable economies of scale.

Thus, my conclusion is that, despite this Congress' commendable
efforts to promote competition in all segments of the industry, the
prospects for robust local competition are highly uncertain, at best.
Because of this uncertain outlook, I believe strong legislative and
regulatory oversight is absolutely essential to protect consumers
and emerging competitors against the exercise of monopoly power.

More specifically, because of the nascent, limited and fragile na-
ture of the emerging competition, I believe the proposed mergers
among industry giants should be given especially close scrutiny,
lest they further entrench incumbent local providers and thwart
the procompetitive deregulatory climate that you tried so hard to
create.

Against this backdrop of uncertainty about the prospects for local
competition, I would like to turn my attention to the proposed
mergers. Based upon my analysis of the situation, I have reached
three fundamental conclusions regarding the mergers.

First, I have concluded that the Bell operating companies indeed
are best positioned to serve as pathfinders or trailblazers in the
road to increased local competition outside their operating terri-
tories. Second, because of their unique positions to compete outside
their regions, and given the uncertainties regarding possible com-
petition from other entrants, I further conclude that the proposed
mergers will significantly diminish the prospects for future com-
petition in the local market.

Indeed, it was my expectation, perhaps naively, that with the
passage of the act, the BOC's and the other incumbent local car-
riers would aggressively expand outside their respective operating
territories and begin to compete head to head with one another.
The proposed mergers drive a stake in the heart of those hopes.

Third, the reduction in the total number of BOC's with the pro-
posed mergers will decrease the future effectiveness of both bench-
mark regulation and benchmark competition. The present industry
structure involving multiple BOC's facilities regulatory and com-
petitive comparisons or benchmarking to the benefit of all consum-
ers.

Thus, I have concluded the proposed mergers will significantly
diminish the prospects for local competition, as well as decrease the
effectiveness of both benchmark regulation and benchmark com-
petition. Hence, I strongly recommend that the Department of Jus-
tice and the other Federal and State authorities give the proposed
mergers the closest possible scrutiny.

That concludes my testimony, Mr. Chairman. I would be happy
to answer any questions you or your colleagues might have.

[The prepared statement of Mr. Hatfield follows:]

Prepared Statement of Dale N. Hatfield
introduction

Thank you Mr. Chairman. I very much appreciate the opportunity to appear be-
fore you today to testify regarding mergers and competition in the telecommuni-
cations industry. I have been involved in the telecommunications policy arena for
about twenty-five years and it is from that perspective that I offer this testimony.

It is obvious, of course, that we are not in the midst of a particularly critical pe-
riod of time — a period of time during which actions taken in the private sector and

decisions taken in the public policy and regulatory sectors will have a profound and
long term influence on the development and deployment of advanced telecommuni-
cations and information technologies. More specifically, these actions and decisions
will play a crucial role in determining whether the American public will actually
enjoy the benefits associated with opening all telecommunications markets to com-
petition as contemplated by the passage of the Telecommunications Act of 1996 ear-
lier this year.

Before I present the substance of my testimony, I thought it might be useful if
I briefly summarized my experience in the telecommunications policy field. One of
my earliest positions was Deputy Chief of the Office of Studies and Analysis in the
Office of Telecommunications Policy, Executive Office of the President. From there,
I went to the Federal Communications Commission (FCC) where I became Chief of
the Office of Plans and Policy. After serving at the FCC, I went to the National
Telecommunications and Information Administration (NTIA) in the U.S. Depart-
ment of Commerce, where I became Chief of the Office of Policy Analysis and Devel-
opment. Subsequently, I became Acting Assistant Secretary and then Deputy Assist-
ant Secretary of Commerce for Communications and Information and Deputy Ad-
ministrator of NTIA. I left government nearly 15 years ago and established a tele-
communications consulting firm in Boulder, Colorado. We have grown to where we
now employee eight full-time professionals with advanced degrees in engineering,
economics, business, and law.

While we have provided consulting services to incumbent local telephone compa-
nies from time to time, the principal part of our consulting work in this area has
been on behalf of long distance carriers and firms seeking to compete in the provi-
sion of local telecommunications services. In addition to serving private sector cli-
ents, I have also served as a consultant to the Department of Justice, to state gov-
ernments, and to foreign governments regarding issues of telecommunications pol-
icy.

In my testimony here today, I will focus on two areas: one, my concerns about
the state of — and prospects for — competition in the provision of local telephone serv-
ice and, two, given those concerns, the public interest implications of the proposed
mergers between Bell Atlantic Corporation ("Bell Atlantic") and Nynex Corporation
("Nynex") and between SBC Communications, Inc. ("SBC") and Pacific Telesis
Group ("PacTel").

PROSPECTS FOR LOCAL COMPETITION

Over the past twenty-five years or so, competition has been successfully intro-
duced into the customer premises equipment and long distance telecommunications
markets. I attribute this success to three major things: (1) the striking down of legal
prohibitions on competition in these two segments of the telecommunications mar-
ket, (2) the lack of significant economies of scale or natural monopoly characteristics
in either of the two segments, and (3) the divestiture of the Bell Operating Compa-
nies from AT&T and the accompanying line-of-business restrictions that reduced the
incentives of the divested BOCs to use their market power to discriminate against
participants in the two segments.

Competition in the local telephone segment of the telecommunications market has
been held back by a combination of factors including: (1) legal barriers to entry at
the state level, (2) the massive size of the initial investments required to duplicate
the existing local exchange network infrastructure, (3) difficulties in gaining the
necessary interconnection arrangements with the incumbent local exchange carriers
and in obtaining needed rights-of-way, (4) unnecessary bundling and resale restric-
tions imposed by the incumbent local carriers, and (5), more generally, difficulties
in overcoming the natural monopoly characteristics of local telecommunications net-
works. Thus, despite local telephone company predictions to the contrary, the degree
of local competition has remained trivial.

In passing the Telecommunications Act of 1996, this Congress took critical steps
to facilitate the development of competition in the provision of local telecommuni-
cations facilities and services. It did so by affirming the policy of relying upon com-
petition in telecommunications generally and, more specifically, by legislating
against statutory and regulatory barriers to entry, by establishing the legislative
groundwork for economical and non-discriminatory interconnection arrangements,
and, among other things, by legislating against unnecessary and unfair bundling
and resale restrictions. Recently, in CC Docket No. 96-98, the Federal Communica-
tions Commission took important first steps to achieve the pro-competitive goals of
the 1996 Act. Despite these critical steps by the Congress and the FCC, I continue
to have strong reservations about whether robust competition in the provision of
local telecommunications services will actually develop.

My reservations stem from two things. First, I am concerned that, unlike the situ-
ation in the long distance and equipment manufacturing sectors of the market fol-
lowing divestiture, the Bell Operating Companies have a strong incentive to impede
competition in their core market — the provision of local exchange and exchange ac-
cess services. Indeed, given the trivial amount of local competition that exists today,
they not only have the incentive, but they also have the power to impede competi-
tion. Second, while striking down statutory and regulatory restrictions and eliminat-
ing or reducing other barriers to entry are necessary, they may not be sufficient to
ensure the development of robust local competition. They may not be sufficient be-
cause of the enormous cost of creating multiple local telecommunications networks
and the high risks associated with gaining sufficient market penetration to achieve
reasonable economies of scale.

These two conditions — the difficulties in dealing with highly entrenched incum-
bent carriers who have a strong incentive to impede competition and the cost of ac-
tually duplicating the existing local telecommunications network and achieving rea-
sonable economies of scale — coupled with some remaining technological uncertain-
ties and risks associated with alternative local exchange networks, explain in large
part why local competition is still not developing rapidly or extensively. Moreover,
our firm's economic modeling suggests that the incumbent local telephone compa-
nies' cost of providing local service is substantially lower than the corresponding
price in many geographic areas in which other providers may wish to compete. As
a result, the incumbent local telephone companies are in a strong position to reduce
prices when and where entry is threatened.

In short, the required investments in alternative local exchange networks are not
only large but highly risky as well. The magnitude of the investment and the high
risks involved go a long way in explaining why (1) the cable industry has apparently
pulled back from full-scale telephony deployment and is focused more on providing
Internet access services and on expanding and protecting their core business of de-
livering entertainment video programming, (2) the emerging wireless Personal Com-
munications Service providers appear to be focused almost entirely upon competing
with existing cellular mobile radio carriers rather than providing ordinary local tele-
phone services, and (3) the competitive access providers (CAPs) still seemed focused
on providing switched and dedicated transport services to business customers in
limited — typically downtown — areas. In this regard, it is important not to confuse
glowing press releases on limited market tests and premature technology "h}T)e"
wdth firm commitments by organizations with substantial financial and technical re-
sources to actually construct alternative networks on a ubiquitous basis.

Thus, my conclusion is that, despite this Congress' commendable efforts to pro-
mote competition in all segments of the telecommunication industry through pas-
sage of the 1996 Act and the Commission's commendable first steps to develop poli-
cies and rules to facilitate that competition, the prospects for robust local competi-
tion are bleak at worst and highly uncertain at best. Because of this bleak, or, at
best, uncertain outlook, I believe strong legislative and regulatory oversight is abso-
lutely essential to protect consumers and emerging competitors against the exercise
of monopoly power. More specifically, because of the nascent, limited, and fragile na-
ture of the emerging competition, I believe proposed mergers among industry giants
should be given especially close scrutiny lest they further entrench incumbent local
providers and thwart the pro-competitive, deregulatory climate that your tried so
hard to create.

EFFECTS OF THE PROPOSED MERGERS

Against this backdrop of uncertainty about the prospects for local competition, I
would now like to turn my attention to the proposed mergers between Bell Atlantic
and NYNEX and between SBC and PacTel. Based upon my analysis of the situation,
I have reached three fundamental conclusions regarding the proposed mergers.

First, I have concluded that the BOCs are especially advantaged as potential out-
of-region competitive entrants into the local exchange and exchange access markets.
Not only do they have the overall advantage of having operated local telephone net-
works for decades, the BOCs, including the four that are currently planning to
merge into two companies, have significant advantages in terms of (a) gaining ac-
cess to the massive capital resources necessary to construct alternative networks on
a ubiquitous basis throughout a region, (b) their knowledge of, and experience wdth,
the technical and economic aspects of interconnection and (c) their knowledge and
experience with billing and Operational Support Systems that are vital to the provi-
sion of local telephone services. Therefore, the BOCs are uniquely positioned to
serve as "pathfinders" or "trailblazers" on the trail to increased local competition
outside their current operating territories.

Second, based upon the first conclusion, and given the entrenched position of the
BOCs within their respective regions and the uncertainties regarding possible com-
petition from other entrants, I further conclude that the proposed mergers will sig-
nificantly diminish the prospects for future competition in the local exchange and
exchange access markets. Indeed, it was my expectation — or, at least, my fervent
hope — that, with the passage of the 1996 Act, the Bell Operating Companies and
other incumbent local exchange carriers would expand outside their respective oper-
ating territories and begin to compete head-to-head with one another. The proposed
mergers drive a stake in heart of those hopes and expectations. Once consummated,
only antitrust action would have any hope of restoring the possibility of that com-
petition.

Third, the reduction in the total number of BOCs through the proposed mergers
will decrease the future effectiveness of both benchmark regulation and benchmark
competition. Let me explain what 1 mean by these terms. While the BOCs fre-
quently march in lock step, differences do arise in terms of, among other things, (a)
their regulatory strategies and tactics and (b) their choice of technologies and serv-
ices. As an example, NYNEX, in the face of regulatory pressure, showed an early
willingness of collocate Competitive Access Provider equipment in their local central
offices. That willingness, no matter how reluctantly produced, aided emerging CAPs
and policy makers and regulators in other regions in establishing the technical and
economic feasibility of collocation.

Likewise, the BOCs have differed in terms of their choice of technology platforms
and service offerings. For example, some BOCs have been strong proponents of the
use of fiber optic technology to offer broadband services while others have favored
the use of a new technology that relies upon expanded use of today's copper tech-
nology. Still others have unveiled strategies for relying upon microwave radio tech-
niques for delivering broadband entertainment programming. There may be good
business reasons why the BOCs choose different technology platforms and different
service offerings, but, given their market power, the regulator cannot be assured
that the choices are always in the best interests of the BOCs' customers. These dif-
ferences give policy makers and regulators, as well as interveners in regulatory pro-
ceedings, the opportunity and factual basis with which to challenge those choices
and to prod or cajole them to improve their perfonnance accordingly. Such chal-
lenges can lead, for example, to more efficient forms of interconnection, better tech-
nology choices, and wider availability of important services.

Differences in BOC technology and service choices also produce a form of bench-
mark or yardstick competition. For example, residential or small business subscrib-
ers desiring economical digital connections to the Internet can put pressure on their
local BOC to provide such services (or to provide them in a more user- friendly way),
based upon popular or trade press accounts of the offerings and performance of
other, out-of-region BOCs. More telling, large business or government customers
with multiple locations and high value communications traffic, can use their experi-
ence in one region to pressure their provider in another region to improve perform-
ance or to offer different services. Even more to the point, with multiple regional
BOCs, a large financial services firm can, for example, threaten to move its commu-
nications-intense "back office" processing facility served by NYNEX in Manhattan
to a nearby location in New Jersey served by Bell Atlantic. By this means, the cus-
tomer can indirectly pressure the incumbent local carrier to improve performance
or lower prices.

SUMMARY AND CONCLUSIONS

In summary, I have concluded, Mr. Chairman, that, despite Congressional efforts
to promote competition in all segments of the telecommunications industry through
passage of the 1996 Act, the prospects for robust local competition are highly uncer-
tain at best. Because of this highly uncertain outlook, I believe strong legislative
and regulatory oversight is absolutely essential to protect consumers and emerging
competitors against the exercise of monopoly power by the incumbent local exchange
carriers.

I have also testified that ( 1 ) the BOCs are uniquely situated to act as pathfinders
or trail blazers in introducing competition outside their current regions, and (2) the
present industry structure involving multiple BOCs facilitates regulatory and com-
petitive comparisons or benchmarking to the benefit of all consumers. 1 have there-
fore concluded that the proposed mergers will significantly diminish the prospects
for competition in the local exchange and exchange access markets as well as de-
crease the effectiveness of both benchmark regulation and benchmark competition.
The importance of these consequences can hardly be overstated given the uncertain
prospects for local competition. Hence, I strongly recommend that the U.S. Depart-

ment of Justice and other federal and state authorities give the proposed mergers
the closest possible scrutiny.

That concludes my testimony Mr. Chairman and I would be happy to answer any
questions you or your colleagues might have.

Senator THURMOND. Mr. Crandall states in his written testimony
that efficiencies from the Bell mergers, "would be reflected in lower
rates for consumers." Could you each please state whether you be-
lieve the Bell companies can be expected to pass the savings
through to consumers instead of simply increasing their profits
prior to competition developing in local telephone markets?

Mr. Crandall.

Mr. Crandall. Oh, you want to start with me? I thought you
were going to ask them to criticize my point of view. Mr. Chair-
man, it is a standard maxim and theorem in economics that even
in a monopolistic industry, declines in costs are passed through to
consumers. In any industry, chances are these costs would be
passed through unless they served as some sort of a signaling de-
vice to keep prices up.

I think there are likely to be substantial efficiencies from a vari-
ety of combinations. I don't think we today can know where they
come from. As long as the mergers themselves do not reduce actual
competition and as long as these companies are not the unique po-
tential entrants into the other's markets — matters which, as Mr.
Huber suggested, will be tested before antitrust authorities — there
is no reason to stop them and we ought to just wait and see. I be-
lieve there will be efficiencies and I do believe that under any mar-
ket structure they will be passed through to consumers.

Senator Thurmond. Does any other member wish to comment on
that? Mr. Binz.

Mr. Binz. Senator Thurmond, I would take exception with that.
For 11 years, I was a consumer advocate in Colorado. I never saw
a utility volunteer to pass through cost savings once. It was up to
the regulators to do that. Now, once they are subject to competi-
tion, I will agree that they will be forced to bring their costs down.
I think if Mr. Crandall's prediction were true, then the Bell operat-
ing companies who are the subject of these merger discussions
would then agree with the proposal that CPI is making here,
namely that they commit to reduce rates reflecting the $900 million
annually in savings that the Bell Atlantic-NYNEX is claimed to
generate. I do not think, however, prior to being subject to true
competition in a region that consumers will expect to see those effi-
ciencies flow through.

Senator THURMOND. Mr. Huber, do you care to comment on this?

Mr. Huber. Well, we don't completely have to speculate about
this. Mr. Hatfield suggested that it was the 1996 Act that per-
mitted these mergers to happen. But, of course, the 1996 Act had
no impact whatsoever on the legality or otherwise of merging local
phone companies, and Bell Atlantic and NYNEX did, in fact, merge
part of their operations some time ago. They merged their cellular
operations, and anybody who seriously studied, not just rhetorically
chatted about that merger, will have to say that the signs there are
pretty good.

Now, it is correct that the cellular market is driven by larger
competitive forces at the moment than the land-line market, but I

don't think anybody disputes that new entry is happening in the
local land-line business, and where prices are not already below
cost — and they won't drop any further below cost if they are al-
ready below cost, but where that is not the case, yes, savings will
be passed on when competitive pressure forces that.

Senator Thurmond. Mr. Hatfield, do you care to comment on
that?

Mr. Hatfield. Yes. I mean, I think one of the very good reasons
that the prices of cellular have come down, of course, is because of
the FCC license to additional providers of cellular service right
here in the district, and that has put competitive pressures on.
What I am saying in my testimony is I have very serious doubts
that certainly in the next few years we will see a lot of competitors,
and absent those competitors, then I don't believe these sorts of ef-
ficiency gains will be passed through to consumers.

Senator Thurmond. Now, could each of you comment briefly on
whether you think the telecommunications industry has received
the clear guidance it needs to know how to position itself in the
marketplace and invest in the new technologies, and what impact
do you believe the appeals of the recent regulations of the Federal
Communications Commission will have?

We will start with Mr. Huber.

Mr. Huber. Well, I think this is an industry that could use a lot
less guidance from both Congress and the FCC. I would like to see
competition providing more of the guidance and regulators less.
The fact is Congress wrote a pretty complicated law earlier this
year and the FCC has written even more complicated regulations
trying to implement it and thrashing that out is going to take some
time. It is a pity it can't be done faster, but basically we are cor-
recting 60 years of bad regulatory policy and it will take a year or
two to work that out.

Senator Thurmond. Mr. Crandall.

Mr. Crandall. Senator Thurmond, I think as I indicated in my
oral remarks, I don't think very many people know where things
are going to settle out in the telecommunications sector and, as a
result, I don't think anybody could give these companies guidance.
We are embarked upon a competitive strategy which is, in a sense,
a grand experiment. No one else has done this in the world, with
the possible exception of New Zealand, and they have spent 5 years
fighting in the courts about it, so we haven't even gotten any guid-
ance from them.

I don't think it is possible to provide guidance in a market which
is being opened up to competition and in which technology is
changing so rapidly. I think these are very, very uncertain times
for telecommunications providers and I think they have to be very
careful as to how they move.

Senator Thurmond. Mr. Binz.

Mr. BiNZ. Senator Thurmond, I think the FCC faithfully inter-
preted the statute which Congress passed. The incumbent monopo-
lies didn't like the result they got and that is why they have gone
to the court on appeal on this. I think the rules are sufficient and
I think they are clear, and I think the FCC recognizes the same
thing that Congress did, namely you can't just remove the barriers
to competition and expect that they happen magically. You have

got to do some work to get it when you are living with a legacy
of a very entrenched monopoly. I think the FCC's rules do that. I
am very dismayed by the stay because I think this does put a road-
block in the way to competition. Hopefully, the courts will not
grant the stays and eventually the FCC will prevail in the appeals.

Senator Thurmond. Mr. Hatfield.

Mr. Hatfield. I think there are three major rulemakings. I be-
lieve the Commission refers to them as the trilogy, and as Mr. Binz
just mentioned, of course, the FCC did come out with a decision
that is being challenged, of course, and that was in the local com-
petition interconnection issues. But we have left, of course, the uni-
versal service proceeding and then a very, very important access
charge reform proceeding. Until, I think, we get all three in place,
I think one cannot say that the rules are clear.

Senator THURMOND. Mr. Huber, given your view of the expand-
ing nature of telecommunications markets, do you think that every
merger which might be proposed in the industry should be per-
mitted? If not, where would you draw the line?

Mr. HUBER. Well, I itemized three or four in my opening re-
marks. I mean, clearly, we would not want Bell Atlantic to acquire
TCI's cable property in Washington, DC. We wouldn't want Bell At-
lantic and SBC to merge their cellular properties in Washington,
DC. Where there is a single geographic market and truly competi-
tive products, of course, you are not going to allow them to merge
unless it is very small players merging to become a more viable
competitor.

So there is plenty of opportunity to enforce the antitrust law
with intelligently defined product markets and geographic markets,
but very little of our discussion today has even bothered to articu-
late what product is competing against which product and in which
geographic area. Until you do that, no intelligent antitrust analysis
is possible.

Senator Thurmond. Does any other member wish to comment on
that?

Mr. BiNZ. Senator Thurmond, in my written testimony I discuss
the LDDS-MFS merger proposal, distinguishing that from the
merger of companies with market power, like Bell Atlantic and
NYNEX. I think there are distinctions that can be made. I think,
arguably, creation of a vertical integration of the kind that LDDS
and MFS are proposing may, in fact, create a more viable competi-
tor, one who is able to go up against NYNEX in its own territory.

However, I think the horizontal mergers, especially when you get
into a situation like a market like New York City, which has been
discussed here today, I think those are problematical. I know the
Department of Justice will perform its duty in reviewing that.

Mr. Crandall. Could I just respond to that briefly? There is very
little in the way of horizontal issues in this case and the major
issue is going to be over potential competition, not horizontal inte-
gration by two competing carriers.

Senator Thurmond. As I noted in my opening statement, merg-
ers are illegal under the antitrust laws only if the effect may be
to substantially lessen competition. In other words, mergers are to
be permitted under the antitrust laws as long as the effect on com-
petition is neutral or causes minimal harm.

Mr. Binz and Mr. Hatfield, while you clearly do not favor the two
Bell mergers, do you believe that their effect may be to substan-
tially lessen competition?

Mr. BiNZ. Senator Thurmond, I think what is relatively unique
about the situation we are talking about is we have just opened a
market to competition, namely local exchange service. We have re-
moved legal barriers which have been in place in some cases for
decades. I agree with the sentiment expressed by Mr. Crandall that
we don't know how this is going to develop. In that circumstance,
it is very difficult perhaps to assess precisely the effect that merg-
ers of the sorts that we are discussing here have had.

But I think it is undeniable that there is some effect on the com-
petitiveness of segments of this market. It needs to be investigated.
I am not an antitrust expert and wouldn't propose to say here
today whether that threshold which you announced has been ex-
ceeded. I think, though, it is undeniable and I think it is frankly
incredible to think that Bell Atlantic and NYNEX would never
have had designs on each other's markets. That is tantamount to
saying that no Bell is going to compete with any Bell. I think that
needs to be examined very closely. I think the suggestion that we
made that that be tied to the opening of their markets via imposi-
tion of the 27 1 requirements as a pre-condition to merger is an ap-
proach to that.

Senator Thurmond. Mr. Hatfield.

Mr. Hatfield. Yes. Well, these companies have had 100 years of
experience in providing local telephone service and the thought
that they are somehow not uniquely qualified based upon that ex-
perience to compete with one another I just don't understand.
Therefore, it is my conclusion that this will significantly lessen
competition.

Senator Thurmond. Now, would any of you care to comment on
the view that, despite their dominant position, the Bell companies
are not fierce competitors in the marketplace because they have
grown complacent from years of regulation?

Mr. Crandall. Well, I will comment on that, Senator. I men-
tioned in my oral remarks and in the response, I guess, to Senator
Leahy that any time a company is protected from competition and
engaged in the regulatory process, they have some difficulty in ad-
justing to an openly competitive world. All you have to do, I sup-
pose, is to ask former airline executives who practice before the
CAB how well they did once competition was opened up.

The idea that they have some sort of unique advantage, though,
as Mr. Hatfield suggested, in providing this service because they
have provided it under a regulatory umbrella for many years, I
think, may even be belied by studies that Mr. Hatfield's own orga-
nization is making today which suggest that a new entrant could
enter at maybe half the cost of these local exchange companies. If
your costs today are twice the costs of what a potential entrant
has, that is some advantage.

Senator Thurmond. It seems that we are in an exciting period
in which many new competitors will be entering the marketplace
and offering new services. While this is a positive development, it
also may lead to a certain amount of frustration and confusion
among consumers and more marketing calls during dinner time. Do

any of you have any advice or encouragement for consumers, other
than to grin and bear it?

Mr. HUBER. Shop around. You will find better deals.

Mr. Crandall. Once again, as I mentioned in my opening re-
marks, one of the reasons for those calls, particularly from long dis-
tance companies, is that the price/cost margin, price over the incre-
mental cost of providing the network services, is so enormously
high. I think once the prices come down due to competition, you
will get fewer calls asking you to switch in return for a check of
$50 or $100.

Mr. BiNZ. Senator Thurmond, I would add that I think that help
is on the way to some extent with the integration of service offer-
ings by providers. I think that is going to be — rather than competi-
tion for your attention for long distance and, separately, competi-
tion for your attention for Internet supply or competition for local
service, packaging of services is probably going to provide some re-
lief. I just saw a study announced last week that a very high per-
centage of people want something we have all been saying here;
namely, one-stop shopping is preferred. I think that is one point
that is going to help.

The second point I would make is that the FCC, pursuant to the
new law, is promulgating rules on the use of information collected
about consumers for purposes of marketing other products. CPI has
endorsed fairly restrictive conditions on which that information can
be used, and I think if the FCC follows through on its notice of pro-
posed rulemaking on customary proprietary network information,
that will also curtail some of the proliferation of calling lists that
are developed through that kind of information.

Senator Thurmond. Mr. Hatfield.

Mr. Hatfield. I don't have anything to add to that.

Senator Thurmond. Now, do any of you have any further state-
ments you would like to make before we close this hearing? Mr.
Hatfield.

Mr. Hatfield. Well, if I could, I think it is awfully important to
focus on this notion that in your home in South Carolina or my
home in Colorado, it is really realistic to think in the next few
years, at least, that there are going to be two or three wires run
in there by different people, or there are going to be different bay
stations placed in my home so that I have a choice of five or six
different local telephone companies. I just simply do not believe
that is in the cards. Therefore, in my opinion, any notion that this
is going to become a highly competitive local market in the short
term is just simply not true.

Senator Thurmond. Mr. Binz.

Mr. Binz. Senator Thurmond, very quickly, I would just say that
you might have the impression from the panels that preceded this
one, with all the discussion about interconnection negotiations and
agreements, that there is some, in some sense, rampant competi-
tion for local services. I am here to report that that is not the case
yet. Hopefully, it will be some day.

Although it is a strange word to apply to these Fortune 500 com-
panies, the word "fragile," in fact, I think the market structure that
we need to have developed to have local competition is fairly frag-
ile. The kinds of rules that the FCC is adopting which are intended

100

to create a market to create the playing field in which the market
can grow is very important. That is why we are here today. Again,
Senator Thurmond, I appreciate very much your calling a hearing
to look at these issues because I think we are at a turning point
as to whether local competition actually does proceed the way Con-
gress hoped it would when it passed the legislation earlier this
year.

Senator THURMOND. Does anybody else have any statement they
would like to make?

Mr. HUBER. If I could just end by summarizing what I think I
just heard to my left here, on the one hand, competition is impos-
sible, it won't happen, there is no prospect for it whatsoever; and,
second, the prospects for competition will be severely diminished if
these mergers are allowed to proceed. Now, you can have one or
the other, but you can't have both.

Mr. Crandall. Let me just also conclude by saying that I per-
haps agree with Mr. Hatfield that the prospects in the short term
for someone coming in and building all new facilities, wire-based
facilities in local markets, may not be very bright. I think they
have been dimmed substantially by the possibility that the
unbundling and resale requirements of the FCC are what they are
and make it so attractive to be a reseller.

But, also, we have to keep in mind that there is a prospect of
wireless competition, and that is a real prospect. The fifth, or
maybe the sixth, depending on how you are counting, entrant into
that business collectively for a nationwide license just bid $10 bil-
lion just for the spectrum to offer that service. Even if the present
value of that is only $4 or $5 billion, that is a huge amount to pay
for the right to enter as the fifth or sixth competitor offering wire-
less service against the wire-line companies. I think we are going
to see real wireless competition before very long for the wire-line
companies.

Senator THURMOND. Mr. Hatfield.

Mr. Hatfield. Could I just add a thought to that, though? In my
looking at what the so-called PCS providers are actually offering,
essentially it is up-banded cellular. It is essentially to compete with
the cellular carriers. As far as I know, there has been almost no-
body that is really proposing a true wireless local loop that replaces
in a fixed sense. It is more to compete with the cellular carriers.
So, therefore, the prospects for true wireless local loop competition,
again, I think are a long way off.

Senator Thurmond. We will leave the record open for 1 week for
members to submit statements. Additionally, members may have
written follow-up questions for the witnesses.

I wish to express my deep appreciation to all of you witnesses
who have testified here today. I think your presence here and your
testimony has been very helpful to this committee.

Now, if there is nothing further, we stand adjourned.

[Whereupon, at 5:12 p.m., the committee was adjourned.]

APPENDIX

Questions and Answers

Response of James R. Young to Question From the Senate Committee on the

Judiciary

Question. What impact will your merger have on consumers? What impact will
your merger have on your ability to compete in international markets? In the long
distance market?

Answer. I believe that the merger will be good news for consumers, as it will bring
them new and better services at competitive prices.

The new Bell Atlantic wdll be large in absolute size, but small in comparison to
the telecommunications giants of the world. Individual companies such as AT&T
Nippon Telephone and Telegraph and Deutsche Telekom are all larger than the
merged company will be. Even after AT&T's divestiture, it will be twice as large
as the new Bell Atlantic. These international giants are also teaming up into global
alliances like the AT&T World Partners, MCI's and British Telecom's Concert, and
Global One of Sprint, France Telecom and Deutsche Telekom.

The location of the new Bell Atlantic, serving both the political and financial cap-
itals of the United States, makes the company a natural challenger to these multi-
national powerhouses. Bell Atlantic and NYNEX customers make about 35 percent
of the international calls from the United States, and we want to be able to begin
to provide competition for these customer's business.

The new Bell Atlantic will be a good competitor at home. We intend to fulfill the
promise of the Act by bringing competition to the domestic long distance market
that has been dominated by AT&T, MCI and Sprint. We expect that the combined
Bell Atlantic/NYNEX will be a better competitor than either company could have
been on its own.

Responses of James R. Young to Questions From Senator Thurmond

Question 1. Mr. Young and Mr. Ellis, many commentators seem to view the two
pending Bell mergers as identical. Would either of you care to address differences
between the two mergers in light of the various competition issues which have been
raised?

Answer 1. I believe that the two mergers are the same in terms of the competition
issues. In both cases, the proposed merger partners do not compete with each other
today. Other than perhaps in their entering the national long distance market place,
dominated today by the Big Three long distance companies, they had no plans to
compete against each other in any market in the future.

Question 2. Mr. Ebbers, to what extent do you consider the merger between
WorldCom and MFS to be "defensive" or compelled by changes such as the Bell
mergers? Do you think that larger telecommunications companies will enhance com-
petition and create greater efficiencies for the benefit of consumers?

Answer 2. Not applicable.

Question 3. Mr. Ebbers, do you expect MFS ever to begin offering service to resi-
dential customers, rather than simply to business customers? How do you respond
to assertions that targeting beg customers first is "cream skimming"?

Answer 3. Not applicable.

Question 4. Mr. Ellis and Mr. Young, how soon do your companies and your merg-
er partners expect to be able to offer inter-LATA long distance service in every state
in your regions?

(101)

102

Answer 4. Both Bell Atlantic and NYNEX individually, and the new merged Bell
Atlantic, plan to meet the competitive checklist as soon as possible and promptly
thereafter to file applications with the FCC for permission to provide in-region long
distance service. At this point, we expect to begin filing these applications early next
year.

Question 5. Mr. Ellis and Mr. Young, when do you expect widespread local ex-
change competition for business and residential customers to occur in your regions?

Answer 5. The exact timing of widespread competition, especially competition in
the residence segment of the market, is in the hands of the competitors, such as
Mr. Ebbers' company. Because of the rate structures established under existing reg-
ulatory regimes, I would expect to see broad competition for business customers be-
fore comparable competition in the residence sector.

Many firms are entering the local telephone business. In New York, there are al-
ready nearly 50 exchange carriers certified to do business. There are somewhat
fewer in Northern New Jersey, and there are significant numbers in Boston, Phila-
delphia, Pittsburgh, Washington, D.C., and Baltimore. These competitors include
the likes of AT&T, MCI, Time Warner and MFS. Even SBC has said that it intends
to compete in our territory, as it already has a presence there.

Question 6. Mr. Young, you indicate in your written testimony that New York City
is one of the most intensely competitive telecommunications markets, with over
twenty local exchange and access service providers. Could you give us some indica-
tion of what share of the local exchange market those companies currently hold?

Answer 6. NYNEX has no way of knowing what share of the local market the
competitive local exchange service providers serve. Looking at some of the data that
are available pubUcly, the following information gives a good indication of the state
of competition in New York City and Manhattan:

There are nearly 50 competitive local exchange carriers certified by the New York
Public Service Commission to provide local exchange service. There are also an addi-
tional 23 wireless service providers licensed to provide local exchange service.

There are 11 competitive local exchange switches operating in the New York City
market. These switches have an estimated capacity of 1.3 million lines.

Based on one market survey, NYNEX had 46.5% of the high capacity DS 1 and
DS 3 service circuits in Manhattan and 54.3% in New York City. NYNEX's share
of the slower speed DS circuits is 61.2%.

NYNEX has assigned 710,000 telephone numbers, or 71 NXX codes, to competi-
tive carriers serving New York City.

Competitive carriers have located 45 physical collocation nodes in NYNEX New
York City central offices, with an additional 27 currently under construction.

New local carriers generated more than 300 million inbound/outbound minutes of
local calls in a recent month in the greater New York metropolitan area, and that
number is growing at more than 10% per month.

Question 7. Mr. Young and Mr. Ellis, I am told that some Bell companies have
negotiated discounts of well over 50% to resell long distance service. Have your com-
panies obtained steep discounts in purchasing long distance for resale, and if so,
was it advantageous to be able to negotiate with more than one company?

Answer 7. Bell Atlantic has an agreement with Sprint to resell Sprint's long dis-
tance service. Under that agreement. Bell Atlantic is not at liberty to disclose the
price it pays for the Sprint service without Sprint's prior written consent, but I be-
lieve that the price we got is competitive with the price that Sprint gives to other
customers. One of the benefits of a competitive market is that buyers have a choice
of sellers and can negotiate with them to get the best possible deal.

Mr. Ebbers, I am also interested in your views on this subject.

Question 8. Mr. Ellis, you state in your written testimony that basic rates for long
distance service have risen, but the long distance companies assert that long dis-
tance prices have dropped by more than half Can you reconcile these contrary
claims? Do discount packages and analysis of different time periods account for the
full diff'erence?

Answer 8. Not applicable.

Question 9. Mr. Young and Mr. Ellis, do you see your mergers as having any com-
petitive impact on the ability of equipment manufacturers to sell to your companies
in the future? Do you see your mergers as diverting management or capital re-
sources and slowing investment in infrasture improvements?

Answer 9. I do not foresee that our merger will have any effect on the ability of
equipment manufacturers to sell to Bell Atlantic.

In order to compete in the market that the Telecommunications Act has produced.
Bell Atlantic must offer new services and improve the ones that it now offers. Im-
proving our infrastructure is one of ways that we can do this. Management will be

103

focused on these efforts and will be expending capital resources whether or not the
merger takes place.

Question 10. When the CEOs of Bell Atlantic NYNEX came to my office to discuss
the need for their merger, they stressed that the combined company would be only
a fraction of the size of the German and Japanese telephone companies. Could you
each please give your perspective on competition with foreign companies, the likeli-
hood of foreign competitors offering local exchange service in this country, and the
need for American companies to become larger in order to meet foreign competition?

Answer 10. The telecommunications marketplace is becoming increasingly inter-
national in scope and is dominated by giant corporations and alliances. Individual
companies such as AT&T, Nippon Telephone and Telegraph and Deutsche Telekom
are all larger than the merged company will be. Even after AT&T's divestiture, it
will be twice as large as the new Bell Atlantic. These international giants are also
teaming up into global alliances like the AT&T-lead World Partners, MCI's and
British Telecom's Concert, and Global One of Sprint, France Telecom and Deutsche
Telekom. These arrangements are not merely ephemeral alliances that will come
and go. British Telecom has invested $4.3 billion in MCI in return for a 20 percent
stake in the company, an ownership interest comparable to what France Telecom
and Deutsche Telekom received in exchange for their $3.7 billion investment in
Sprint. These foreign concerns, through their interests in MCI and Sprint, are ac-
tively entering local telecommunications markets. In order to remain competitive,
American companies must come close to matching the scope, efficiency and buying
power of these firms.

Responses of James R. Young to Questions From Senator Le.vhy

Question 1. A draft released last month by the Vermont Department of Public
Service, states that the NYNEX-Bell Atlantic merger is expected to reduce operating
expenses for NYNEX by about 5 percent. A press release issued jointly by Bell At-
lantic and NYNEX estimated approximately $600 million in annual, recurring ex-
pense savings by the third year following the merger. That $600 million in annual,
recurring expense savings by the third year follovdng the merger. That $600 million
was said to consist of approximately $300 million from reduction of 3,000 corporate
and administrative management positions.

Question A. Do you stand by those estimates?

Question B. In a recent filing before the Vermont regulatory authorities, NYNEX
indicated the good news that "no union represented employee will be laid off as a
result of the merger." On the other hand, NYNEX indicated that about 1,500 redun-
dant management positions from within NYNEX will be eliminated. How many of
these positions will be eliminated in Vermont?

Question C. From what specific sources do you expect cost savings resulting from
the merger to arise if there will be no loss of union jobs and only minimal loss of
management jobs?

Question D. Will these reduced operating expenses be passed along to Vermont
ratepayers, and if so, how soon can Vermont ratepayers see these savings?

Question E. How much of those cost savings are related to the core local telephone
businesses, as opposed to other businesses such as cellular and foreign ventures?

Question F. Will competitive pressures be sufficient to assure that consumers
enjoy a reasonable share of those cost savings?

Answer A. Yes.

Answer B. We have not gotten far enough into our merger integration planning
to be able to answer this question.

Answer C. First, I want to make it clear that we are not talking about firing 3,000
employees. What we are talking about is eliminating 3,000 positions, while finding
other positions for many of the people now in those slots. This will make our exist-
ing operation more efficient and free up valuable human resources for jobs in grow-
ing segments of our business.

Moreover, we expect that the merged Bell Atlantic will be able to achieve a vari-
ety of other cost savings. For example, the combined companies should be able to
qualify for larger volume discounts from suppliers.

Answer D. The cost savings associated with the elimination of the 1500 positions
will be allocated to its Vermont operations according to the company's usual cost
allocation procedures. The extent to which these cost savings are ultimately re-
flected in prices will depend on many factors, including the overall financial per-
formance of the business, the competitive environment and competitive pressure on
prices existing at the time.

104

The greater efficiencies that are accrued as a result of the proposed merger will
assist the post-merger corporation in holding down cost pressures and in responding
to competitive pressures. Competition, not regulation, will drive rates in the future.

Answer E. We are not far enough along in planning the post-merger organization
to be able to answer in any detail. However, because our cellular companies merged
some time ago and because our foreign enterprises are relatively small, we would
expect that most of the savings would come in the telephone exchange, toll and re-
lated areas of the business.

Answer F. Yes.

Question 2. Some press reports have suggested the job cuts resulting from the
NYNEX-Bell Atlantic merger are being understated. Bell Atlantic has fewer workers
per access line than NYNEX. Apparently, NYNEX would have to lose about 10,000
jobs to get down to Bell Atlantic's worker to line ratio. Do you anticipate efforts in
a merged company to reduce NYNEX's worker to line ratio? If so, would that mean
any job losses in Vermont?

Answer 2. We do not have any plans of this sort. However, the merged company,
just like the two companies if they do not merge, will continue to strive to become
more efficient in ways that will make it more competitive in the marketplace.

Question 3. In the early 1990's NYNEX in Vermont went through a period of
downsizing its workforce. This trend seems to have turned around this year and I,
obviously, would like to see this growth trend continue. What effect do you antici-
pate the merger will have, if any, on continuing job growth with NYNEX in Ver-
mont?

Answer 3. Over the long term, I expect that the merged company's workforce in
Vermont will grow as the company expands its offerings to its Vermont customers.
The merged company will flourish in the global marketplace, and our employee base
will grow as well.

Question 4. In your testimony, you indicated Bell Atlantic's "intent to fulfill the
promise of the Act by bringing competition to the domestic long-distance market."
By merging with NYNEX, Bell Atlantic has delayed its ability to offer long-distance
in the current NYNEX region.

Question A. Will the mergers in fact delay your entering the long-distance market
in the new combined regions?

Question B. How will the merger help Bell Atlantic and NYNEX better compete
in the long distance market?

Answers A and B. Both Bell Atlantic and NYNEX are each working hard to com-
ply with the Telecommunications Act's competitive checklist, and we expect to be
ready to file applications to enter the interLATA business in our states early next
year.

The domestic long distance market today is dominated by the Big Three carriers,
AT&T, MCI and Sprint. Even after its divestiture, AT&T will be twice the size of
the merged Bell Atlantic-NYNEX combination. MCI and Sprint are partly owned
and funded by foreign telecommunications giants, British Telecom, France Telecom
and Deutsche Telekom. We will need all the human and technical resources of the
new Bell Atlantic to compete with these firms.

Question 5. Bell Atlantic and NYNEX reportedly plan to resell Sprint long-dis-
tance service outside their collective territories.

Question A. Is this report correct?

Question B. When do you expect to reach agreement with Sprint?

Question C. When do you expect to begin offering long-distance service over the
Sprint network?

Question D. How does the NYNEX-Bell Atlantic merger affect the agreement with
Sprint?

Answers A, B, and C. Both Bell Atlantic and NYNEX individually entered into
contracts with Sprint that allow them to resell Sprint long distance service. Bell At-
lantic has been authorized to provide long distance service in Michigan, Texas,
North Carolina, South Carolina, Illinois, Ohio, Oregon, Florida, Iowa, Montana,
Tennessee, and Utah, while NYNEX has been authorized in California, Colorado,
Florida, Hawaii, Idaho, Indiana, Iowa, Illinois, Kentucky, Michigan, Montana, Ne-
braska, North Dakota, Oregon, Texas, Washington, Wisconsin and Wyoming.

Answer D. The terms of these arrangements are confidential, and Bell Atlantic
cannot disclose them without Sprint's prior written approval.

Question 6. Vermont has not yet adopted price cap regulation, but has a proceed-
ing ongoing to consider doing so. To ensure that ratepayers enjoy the benefits of cost
savings from the mergers, should regulators insist that those savings be passed
along to ratepayers, particularly in those States with price cap regulation? If not,
could you explain why?

105

Answer 6. Price regulation establishes incentives for companies to be more effi-
cient, while protecting customers against price increases to basic services. As such,
under price caps, the company would not expect to seek a rate increase for transi-
tion and integration costs associated with the merger, nor would it expect rate de-
creases expressly to account for potential future benefits from the merger. Ulti-
mately, it will be the market that will pass on any savings that the company
achieves.

Question 7. Bell Atlantic has announced plans to "rebalance" rates in Pennsylva-
nia, despite the rate freeze that Bell Atlantic agreed to there just a few years ago.
The result of the rate change that Bell Atlantic is proposing would lower urban and
suburban rates while raise rates in rural areas.

Question A. If the merger with NYNEX goes through, will you urge a similar "re-
balancing" of rates in the rest of the combined Bell Atlantic-NTNEX region?

Question B. In the event Bell Atlantic's proposed "rebalancing plan" is adopted in
Pennsylvania, how much do you estimate the rates in rural areas will rise?

Question C. If the same "rebalancing plan" proposed by Bell Atlantic in Penn-
sylvania were proposed for Vermont using the same criteria for urban, suburban
and rural areas, how would telephone rates be affected in each area?

Answers A, B, and C. Under existing tariffs in Pennsylvania, Bell Atlantic resi-
dence service customers in rural areas pay less for basic telephone service than cus-
tomers in Philadelphia and Pittsburgh, even though the cost to provide that service
is higher in rural areas. Although the proposed rate rebalancing plan would raise
rural customers' raters, these consumers would still pay less than customers in the
big cities.

We have no plans to propose similar rebalancing in Vermont. There are discus-
sions underway with the Vermont Department of Public Service to develop a price
cap proposal that we would expect to last for the next few years. There are no plans
or proposals for geographic deaveraging of rates in those discussions. No estimates
exist that apply the Pennsylvania proposal to rates in Vermont.

Question S. Will the Bell Atlantic-NTNEX merger affect the timing of the NYNEX
offering video programming in Vermont and, if so, how?

Answer 8. There are at present no specific plans for offering video programming
in Vermont. To the extent that the new Bell Atlantic believes there is a market op-
portunity for video programming in Vermont and that the Vermont market justifies
the significant investments required for that business, then it is possible that the
merger could facilitate its introduction.

Question 9. I understand that NYNEX and Bell Atlantic have no fewer than 25
different "Joint Merger Teams" focused on how to meld the companies together. At
the same time, potential new entrants in the local market need the attention of
these two companies focused on satisfying contractual and regulatory requirements
on interconnection and unbundling.

Question A. What assurance can you give that the merger will not interfere in
any way with complying with these new requirements?

Question B. If a potential new entrant ordered 10,000 local loops tomorrow, how
long would it take NYNEX or Bell Atlantic to fill the order?

Answer A. We must comply with these new requirements if we are to get into
the interLATA business in our territory. This, without more, will ensure our speedy
compliance. Moreover, interconnection negotiations and arbitrations are governed by
strict schedules prescribed in the Telecommunications Act, which ensure that issues
will be resolved in a timely fashion.

Answer B. A local loop is a facility dedicated to an individual customer that runs
from the telephone company office to the customer's location. I have a loop running
to my home, separate from the two going to my next door neighbor and the 15 to
the school across the street. A new entrant will not order an unbundled loop to an
existing subscriber unless it has made a sale to the customer at the end of the loop.

The time it will take to provide an unbundled loop, or a number of unbundled
loops, will depend on the complexity of the request — for example, whether the
10,000 loops represent a single large customer in a single central office or are scat-
tered throughout multiple central offices, and whether additional steps, such as con-
ditioning, must be taken to provide loops with the capabilities requested by the new
entrant. For this reason, it is not possible to give a single, answer to the question.
Bell Atlantic and NYNEX will negotiate the installation intervals for unbundled
loops with the new entrant based on the complexity of the request, and if no agree-
ment can be reached, then arbitrators in each State will make determinations con-
sistent with the Telecommunications Act.

Question 10. Some analysts have urged that the mergers between Regional Bell
Operating Companies be approved only after the companies have met the "competi-
tive checklist" contained in the Telecommunications Act of 1996 for each of the
states in which they operate today. This would not guarantee but would certainly

106

help assure that resources continue to be directed first to opening up the local loop
and then to the merger.

Question A. Since both NYNEX and Bell Atlantic presumably intend to comply
with the competitive checklist, what objection, if any, do the companies have to this
proposal?

Question B. If the Bell Companies were required to meet the "competitive check-
list" before the pending mergers are approved, would the timing of the mergers be
delayed? If so, for how long do you estimate the mergers would be delayed?

Answers A and B. The proposal is completely illogical and unnecessary.

First, the competitive checklist of section 271 of the Communications Act is part
of the test for Bell company entry into the interLATA business in the areas in which
they currently provide local exchange service. It has nothing to do with a Bell com-
pany's entry into the local exchange business in a different area, whether by merg-
ing wdth the incumbent or othervirise. The antitrust laws prescribe the standard for
preventing this merger — whether it will substantially lessen competition in some
line of commerce.

Second, companies like Bell Atlantic and NYNEX already have a powerful incen-
tive to comply with the competitive checklist because they cannot get into the long
distance business until they do so.

At this point, we expect to be in compliance with the checklist early next year.
Although harder to predict, we also expect to receive the regulatory approvals we
need for the merger in that same time period.

Question 11. Consumers want to know what this merger will mean for their qual-
ity of service, things like repair intervals, customer trouble reports and missed serv-
ice appointments. On this score, NYNEX has been required to pay $4.1 million in
rebates to customers in New York because of poor service quality. The New York
Public Service Commission found that service quality was worse on every level com-
pared to the prior year. Competition forces rivals to provide better service. With the
merger, NYNEX customers will be denied the opportunity for improved service that
would follow if Bell Atlantic had entered as a competitor instead of as a new owner.
How will the merger with Bell Atlantic give NYNEX customers in New York, as
well as Vermont, better service than if Bell Atlantic had entered the local phone
service market as a competitor?

Answer 11. Bell Atlantic is neither an actual or potential competitor for local tele-
phone service in Vermont. Bell Atlantic has no network facilities in Vermont with
which to supply services. There are other telecommunications firms that already
have network facilities, customers and brand recognition in Vermont, and these
firms are much more likely to enter the Vermont telecommunications market than
in Bell Atlantic, NYNEX and Bell Atlantic believe that customer service will be im-
proved in Vermont and elsewhere under the new Bell Atlantic. The merged company
will unite the skiUs, talents and know-how of researchers, network engineers, man-
agers and other employees now working separately in each of the two merging com-
panies. Each compan/s "best practices" will be transferred to the other and benefit
the customers of both.

Question 12. Bigness seems to be a major justification for the Bell Company merg-
ers. Both NYNEX and Bell Atlantic have said that being bigger will allow them to
exploit economies. Taken to its logical extreme, if bigger is better, a combination of
all the Bell Companies would be even better. What is it about these two particular
companies that make their merger in the public interest of Vermont and the other
States in the combined region?

Answer 12. This merger combines two corporations that currently serve two adja-
cent, but distinct, parts of the northeast corridor from Maine to Virginia. The com-
bined territory is one of the most communications-intensive regions in the world,
and one of the most competitive. The merger will create a company better able to
compete with companies like AT&T and MCI, with lower unit costs and greater effi-
ciencies.

Responses of James R. Young to Questions From Senator Feingold

Question 1. Obviously, Bell Atlantic/NYNEX would not be merging if there were
not sufficient cost efficiencies to be gained. I saw in your press materials at the time
of the merger announcement that the Bell Atlantic/NYNEX merger will result in
cash savings of $900 million a year.

Question A. How much of the expected $900 million in cash savings do you expect
to pass on to consumers? Please provide estimates as to how much consumer prices
will come down relative to c\irrent levels as a result of these mergers.

107

Question B. How specifically will those cost savings be passed down to consumers
in your service region? Please provide a time line for the projected price reductions
and identify the lines of service for which you expect the greatest price reduction.

Answers A and B. Competition is the best tool to ensure that consumers benefit
from efficiencies and cost savings. As local telephone companies hke those owned
by Bell Atlantic and NYNEX are freed from the restrictions of rate regulation by
the states and the FCC, they will have the flexibility to be more price competitive
and have the ability to pass these and other savings on to their customers.

Question 2. Some of the biggest concerns for new entrants into local service in-
clude both the terms of the interconnection agreement as well as the quality of the
service provided to the entrant for the network elements they are reselling. I know
that some of the new entrants to local markets and some of your existing coinpeti-
tors are very concerned about both the ability and the willingness of the RBOCs to
properly provide service, maintenance and interconnection during the merger transi-
tion period.

Question A. What assurances can you provide customers and competitors that the
quality of your service will not be affected during the merger transition period?

Question B. If you believe service to those businesses with which you have inter-
connection agreements will not be affected by the merger, why do you oppose tying
approval of the merger to a requirement that service to those competitors be no
worse than prior to the merger as suggested by Mr. Atkinson from Teleport?

Answers A and B. Telephone companies like those affiliated with Bell Atlantic
and NYNEX are already under strict non-discrimination obligations, which assure
that the quality of service they provide to Teleport is at least as high as those com-
panies provide to themselves and their own customers. However, nothing in the
Communications Act requires or authorizes what Teleport has asked for — the estab-
lishment of mandatory service performance standards and penalties for failures to
meet such standards — and the FCC has declined to do so.

Bell Atlantic has committed to provide service to Teleport at levels that meet or
exceed Bell Atlantic's average network performance levels and to provide Teleport
with performance reports generated in the ordinary course of business. As long as
Teleport, or any other competitor, receives service that is comparable to that which
Bell Atlantic provides to itself and its customers, the interests of a fair competitive
marketplace are satisfied.

Since the date of the hearing, Bell Atlantic has voluntarily reached agreement
with Teleport on a set of quality and performance measurements that Bell Atlantic
will provide to allow Teleport to determine whether the service Bell Atlantic pro-
vides Teleport is on parity with the service Bell Atlantic provides to itself and oth-

Response of James D. Ellis to Question From Senate Committee on the

Judiciary

SBC Communications Inc.,

September 18, 1996.

Hon. Patrick J. Leahy,
U.S. Senate,
Washington, DC.

Dear Senator Leahy: On September 11, 1996, I testified at a hearing before the
Senate Judiciary Committee on "Mergers and Competition in the Telecommuni-
cations Industry." During that hearing, you asked a series of questions concerning
the issue of Bell companies competing with one another. Your inquiry focused on
the issue of whether or not the Bell companies intended to compete with one an-
other in the local exchange marketplace. In response to your questions, a difference
of opinion arose between Bernard J. Ebbers, President and Chief Executive Officer
of LDDS WorldCom and me over the facts on this issue. You invited us to supple-
ment the record in order to correct this discrepancy.

BACKGROUND

Dviring the hearing, you observed that number of long distance companies and
local access providers have sought interconnection with the incumbent Bell compa-
nies to bring some competition to the local exchange. You suggested that the Bell
companies can do the same thing, but have not. You paraphrased and quoted, in
part, from Mr. Ebbers' written testimony which stated that despite their expertise
in the provision of local phone service, "not one of the Bell's applications to offer
service in an out of region state requests certification as a local carrier." See Written

108

Testimony of Bernard J. Ebbers at p. 2. You then asked Mr. Ebbers if that was a
"fair" reading of his written testimony. Mr. Ebbers acknowledged that your charac-
terization of his written testimony was "fair." You then asked if it was correct that
no Bell company has filed to provide service as a local carrier outside their own
service territory. I responded that this was not correct, and indicated that SBC had
filed in Illinois and New York. Mr. Ebbers disagreed with me, and stated that SBC
had really filed to be a long-distance carrier in those states. I reaffirmed that SBC
had filed to obtain a certificate to provide local exchange telephone service in Illinois
and New York, and went on to describe SBC's strategic plan to compete out-of-re-
gion where it has network facilities, brand name recognition, and a customer base.

THE FACTS

SBC, through its subsidiaries, has filed applications for and has obtained certifi-
cates of authority to provide both local exchange and interexchange services in Illi-
nois and New York.

In Illinois, SBMS Illinois Services, Inc., an indirectly wholly owned subsidiary of
SBC, was granted a Certificate Of Interexchange Service Authority "to provide
interexchange telecommunications services within MSA-1," a Certificate of Service
Authority "to provide and resell local exchange and intraMSA interexchange tele-
communications services in those portions of MSA-1, served by Illinois Bell Tele-
phone Company and Central Telephone Company," and a Certificate Of Exchange
Service Authority "to provide facilities-based exchange telecommunications services
in those portions of MSA-1 served by Illinois Bell Telephone Company and Central
Telephone Company" on December 20, 1995. (Emphasis added.) A copy of the Order
from the Illinois Commerce Commission granting SBC this authority is attached
hereto.

In New York, SBMS New York Services, Inc., also an indirectly wholly owned sub-
sidiary of SBC, was granted a Certificate Of Public Convenience and Necessity "to
provide point-to-point, switched and non-switched intercity and intracity tele-
communications service and to resell all forms of telephone service in the State of
New York" on October 25, 1995. (Emphasis added.) The order granting this certifi-
cate noted that SBMS New York Services, Inc. petitioned to provide "residential and
business local exchange service." A copy of the Order Issuing Certificate Of Public
Convenience and Necessity from the New York Public Service Commission granting
SBC this authority is attached hereto.

If you or any members of the Committee have any further questions concerning
this issue, or any other matter raised during the hearing, please do not hesitate to
contact me.

Respectfully yours,

J.D. Ellis.

[Editor's note: The above mentioned attachments are located in Committee
files.]

Responses of LDDS WorldCom to Senators' Questions

Question 1. I understand that the most lucrative segments of the local exchange
market are the urban and commercial markets. What percentage of your local ex-
change revenue do you anticipate getting from these markets?

Answer 1. While the term "most lucrative" can mean the most profitable, we un-
derstand the question to mean the services with the highest comparative prices,
when viewed against residential service. It must be remembered that that rate
structure was developed between the incumbent local exchange carrier and Public
Service Commission through proceedings designed to subsidize basic local residen-
tial rates. The practice of charging higher rates to commercial customers for essen-
tially the same service was developed as a by product of the expansion of the avail-
ability of telecommunications service throughout the United States. The Bell System
started in major metropolitan area, city to city, and added residential service along
the way. LDDS WorldCom will commence entry into the local exchange market in
the same way that ILECs did over the past one hundred years: provide service to
commercial customers to support build out and investment, add residential service
as the network will allow.

The issue is not strictly an urban, suburban issue. WorldCom's entry strategy into
the long distance market was to serve customers in urban and rural areas. While
local service network build out logically might occur in business areas, today the
term business area includes commercial investment that is being made in what was
once considered a rural area.

109

If the term "most lucrative" was meant to address the most profitable segment
of local service, the predicate for the question is plainly wrong. The most profitable
segments of the local exchange market would be the ancillary services, e.g., CLASS
and Caller ID services, that are offered primarily to residential customers.

With that said, over the short term WorldCom expects to obtain over 95% of its
local revenues from commercial markets. There are other carriers that have indi-
cated they will be entering to serve residential markets at the outset, e.g., AT&T,
MCI, TCG, and others. Moreover, service v^ill continue to be available form the in-
cumbent local exchange carrier. Note, however, that WorldCom includes in its defi-
nition of commercial markets the carrier customers that do provide service to resi-
dential customers. Accordingly, WorldCom's network is being used to provide resi-
dential services.

Question 2. You have testified that your company relies on the Bells' existing net-
works in the local exchange markets. Is this true even where MFS already has an
existing network? Could you explain why?

Answer 2. As the question implies the answer is yes.

Local service entry on a facilities basis is a building-by-building connection proc-
ess. In order to serve customers that are not presently connected to the MFS net-
work, at a minimum, we will have to rely upon the facilities of the incumbent car-
rier for connection to the customer premises. In certain areas customers may have
diverse office locations, including home offices or telecommuting facilities. In one
area we may have facilities, in others we may not. The customer may want service
from one provider for all services at all locations. Without using the incumbent local
exchange carrier, including the Bell Operating Companies, we would be foreclosed
from the market.

Question 3. How much of an advantage do you think an incumbent local exchange
provider would have in the long distance market due to customer loyalty and/or
preference for so called-one stop shopping?

Answer 3. The question is hard to answer because different customer types have
different perceptions and incentives to adopt one stop shopping, and may or may
not have customer loyalty. For example, one incvimbent local exchange carrier may
have a great relationship with its customers, other may have the monopolist tag
that has created a ground swell to leave that carrier.

The advantage the incumbent local provider has it is primarily focused on the fact
that the customer has never tried a different local phone company. Therefore, any-
one competing with the incumbent must provide service equal to or better than the
incumbent. By contrast, many customers are already comfortable about switching
long distance carriers. They are aware that it does not affect the quality of their
essential local service. Note that almost every single IXCs customer obtains local
service from the incumbent. For the most part, the customer is satisfied with the
local service and is dealing with a known entity. Local service more than long dis-
tance service is a critical service to the end user. If long distance service is disrupted
on one carrier's network, customers either know, or are advised as to, how to dial
another carrier's network to handle calls during the outage. Customers view local
service differently. So the advantage goes to the incumbent at the outset.

Preference for one-stop shopping is a function of what services will be included
in the package of services. LEC addition of long distance service, as a technical mat-
ter, is just an extension of their existing intraLATA long distance services. The
ILEC presently has the full array of local services. It just needs to add the phrase
long distance and international services to its advertising and collateral sales mate-
rial. The story the other way is much different.

Facilities-based competitive local exchange carriers appear to be in a similar posi-
tion to the ILEC for the customers they are able to serve over their own facilities.
However, where they must rely upon the incumbent LEC for underlying service,
they are at the mercy of the incumbent's pricing practices for services made avail-
able for resale, or, if they are using unbundled elements, the features and functions
that are included with the unbundled element and the administrative processing
procedure to obtain them. Few incumbent LECs have demonstrated a desire to meet
on the competitor's terms the needs of the competitors in provisioning the wholesale
products. The combination of control over the service, its prices and provisioning dis-
tinguishes the Incumbent LEC advantage from the IXC advantage.

Don't you think it works both ways — that is, wouldn't an incumbent long distance
provider have an advantage in the local market due to customer loyalty and/or pref-
erence for one-stop shopping?

No, see above.

Question 4. Sen. Feingold: MFS and WorldCom have had to rely on the RBOCs
for at least some degree of interconnection to achieve the market penetration you
currently enjoy. What concerns do you have in terms of MFS's interconnection

110

agreements with the BOCs with respect to the merger of SBC/PacTel and Bell At-
lantic/NYNEX?

Answer 4. The primary concern is in the implementation of the interconnection
agreements. In a traditional marketplace client/vendor relationship, the vendor is
seeking to accommodate the client's desires as to service quality and delivery time-
table. The shifting regulatory/legal sands in our industry, coupled with an incum-
bent's absence of desire to provide the wholesale service or interconnection in the
first place, gives the RBOCs the ability to waffle and twist and turn on each issue.
There is no wholesale competitor to which a BOC risks losing material portions of
this new business over the next several years. By merging with a powerful potential
competitor, the incumbent retains its position in these markets, and the potential
competitor has gained the incumbent's advantage in the new territory. Both incum-
bent's revenues are protected in the merger process. While the competitive entrants
now face a stronger, more formidable opponent.

Question 5. Sen. Thurmond: Mr. Ebbers, to what extent do you consider the merg-
er between WorldCom and MFS to be "defensive" or compelled by changes such as
the Bell mergers? Do you think that larger telecommunications companies will en-
hance competition and create greater efficiencies for the benefit of consumers?

Answer 5. Size will enable carriers to generate resources to provide additional
services and employ more advanced technology, that should lead to consumer bene-
fit. Is there a point where size becomes a non-factor, or can a carrier reach a point
of being so big that being bigger has little or no meaning? Can carriers be of such
size that they can act without fear in trampling out competition? Probably, but it
is not an issue for a company with less than a 59c market snare.

The WorldCom/MFS merger is an offensive move to take advantage of the market
opportunities presented by the changing environment and retain customer base,
while attempting to achieve the capabilities of carriers such as Bell Atlantic/NYNEX
and SBC/PacTel. The merger is driven by many factors in the marketplace: the
changing regulatory environment, the ability to provide a combination of services,
the need to rely upon the monopolist competitors facilities, the reluctance of the in-
cumbents to give carriers what was being requested, etc.

Question 6. Mr. Ebbers, do you expect MFS ever to begin offering service to resi-
dential customers, rather than simply to business customers? How do you respond
to assertions that targeting big customers first is "cream skimming"?

Answer 6. WorldCom would direct the questioner to the first response. We're not
sure what "cream skimming" means.

Does it mean that MFS WorldCom will introduce services that are only high mar-
gin services? As noted that is where the Bell's focus today. The advertising for their
services that I'm aware of is targeted to those services that have margins in the
range of hundreds and thousands of percent.

Does it mean that MFS WorldCom will confine its service areas to the service
areas that are most populated? We probably will, but isn't that what the Bells do
today? Isn't that why we have so many independent telcos, because the Bell compa-
nies didn't want to serve those areas?

Does it mean that by first addressing the business community MFS WorldCom
will be able to generate sufficient funds to deploy its network to serve all types of
customers that its facilities pass? Isn't that how the Bell's did it? (Not to mention
MCI and Sprint.) And, given the costs involved, even after those substantial Bell
resources were deployed they couldn't handle the expansion to more remote areas.
The regulators had to contribute to the effort through the use of universal service
funds and other subsidies.

Does it mean that MFS WorldCom will enter the market in a manner that good
business judgment dictates? Then the answer is we will, just as the Bell System did.

Answer 7. Mr. Ebbers, I am also interested in your views on this subject.

From WorldCom's point of view, the Bell companies were such good prospects that
the IXC wholesale carriers sought to offer attractive prices that would win their
business. That is a competitive environment. The effectiveness of the ability to nego-
tiate in a competitive environment is demonstrated by (1) the BOCs ability to de-
mand the terms, including rates, under which the services were to be provided, (2)
the discounts achieved, and (3) the willingness of the carrier to accommodate the
BOCs desire. Those wholesale carriers wanted the BOCs business. The BOCs ability
to address common objectives and combine together in negotiations further en-
hanced their negotiating posture. The market incentive are not the same when en-
trants are negotiating with an entrenched monopolist.

Ill

Responses of Robert C. Atkinson To Questions From Senator Hatch

Question 1. Can you tell me exactly why you believe that the Bell mergers will
make competitive access providers more dependent on Bell service?

Answer 1. The concern I expressed in the hearing is that an RBOC merger may
cause the quality of the competitive interconnections provided by the resulting "Big
Bell" to deteriorate, at least in the near- term. Competitive local exchange carriers
(CLECs) depend on these interconnections (i.e., unbundled loops, completion of calls
to the Big Bell's subscribers) to provide their competitive services. Therefore, a dete-
rioration of the Big Bell's interconnection quality immediately impairs the quality
of the CLECs customers, who hold the CLEC accountable for the total quality of
the service.

However, I do not believe that a merger changes CLECs' dependency on Bell serv-
ices. For the foreseeable future, every competitive local carrier will be dependent on
the faciUties and services of the incumbent local exchange carrier (ILEC), whether
the ILEC is a small "independent" telephone company, a giant GTE "independent,"
a current RBOC, or a "Big Bell" resulting from an RBOC merger.

Question 2. As you recognized, section 251 of the Telecommunications Act already
requires incumbent local exchange carriers to provide interconnection at least equal
in quality to that provided by the local exchange carrier itself I think Congress has
already expressed its intent with regard to interconnection performance standards.
Is it consistent with this intent for additional performance standards to be imposed
through a consent decree?

Answer 2. Yes.

TCG's proposal is simply that, at a minimum, a consent decree condition must re-
quire the "Big Bell" to maintain the status quo with respect to the quality of inter-
connection with competitors. In my opinion, maintaining the status quo is not an
"additional" performance standard and, more importantly, such a condition would
be fiilly consistent with Congressional intent that Sec. 251(c) establish critical com-
petitive safeguards.

In particular, I believe that Congress intended Sec. 251(c)(2)(C) to be a competi-
tive safeguard to protect competitors, who are utterly dependent on interconnection
with the ILEC, from a number of anticompetitive abuses which have characterized
"interconnection" since the earliest days of the telephone industry. I also believe
that Congress expected ILEC performance to generally increase as a result of new
technology and the prospect of competition so that Congress expected that Sec.
251(c)(2)(C), as a competitive safeguard, would provide CLECs with a flexible, evolv-
ing and improving standard of interconnection quality. ^ By contrast, since tying a
competitor to a deteriorating quality of interconnection would not be an effective
competitive safequard, I doubt that Congress intended that a competitive safeguard
could have this perverse result.

My conclusion, therefore, is that Congress expected interconnection quaUty to be
generally improving and not deteriorating and enacted Sec. 251(c)(2)(C) with this
expectation in mind. A consent decree condition that merely requires the status quo
would be perfectly consistent with such Congressional expectation and intent. In-
deed, a consent decree condition that required steady improvement of the ILEC's
interconnection quality would also be consistent with this Congressional expecta-
tions and I would hope that the Department of Justice would seek such a more
stringent and pro-competitive condition.

Responses of Robert C. Atkinson to Questions From Senator Thurmond

Question 1. As I indicated in my opening statement, I am interested in your views
about how competition in local exchange and long distance services may develop
over the next few years, and particularly your estimates of the number of likely
competitors with substantial shares of those markets. Would each of you please
comment.

THE CLEC industry CURRENTLY

Answer 1. I have attached to this response a report entitled "Local Telecommuni-
cations Market Shares" published in July 1996 by New Paradigm Resources Group.
New Paradigm and a predecessor research organization have been following the de-

' I suppose that one could argue that Sec. 251(c)(2)(C) fixes the quality standard at the level
which existed as of the date of enactment. If this were thee case, I would agree that a consent
decree condition requiring the status quo would not be necessary.

177

0.4

540

10.6

0.28

264

1.8

112

velopment of the competitive local telecommunications industry for a number of
years. New Paradigm's conclusion (pp 10-11) is;

"While CLECs continue to grow at healthy rates, the total telecommunications
market also continues its upward growth. Therefore, CLEC market share has not
increased enough so that an argument can be made that meaningful competition ex-
ists. * * * Market share, in this instance, can be used as an indicator of the 'fragil-
ity of the nascent competition.

"CLEC market share has increased for all component of the local telecommuni-
cations market, but it still remains minuscule when compared to the revenues and
market shares of the RHCs."

The report demonstrates that CLECs had the following revenues and shares of
the sectors of the local telecommunications market in 1995.

$ Million Share {%)

Local exchange service

Dedicated access

Switched access

IntraLATAToll

With respect to the above table, I would observe that it took the CAP/CLEC in-
dustry 10 years to collectively achieve the 10.6 percent share of the "dedicated ac-
cess" market sector.

TELEPORT COMMUNICATIONS GROUP CURRENTLY

I believe that Teleport Communications Group (TCG) is the nation's largest facili-
ties-based competitive local exchange carrier (CLEC). Our nationwide revenues (all
from local telecommunications services) for the first six months of 1996 were ap-
proximately $123 million and it is estimated that the "local telecommunications"
market was about $50 billion for the same six months. On a revenue basis, there-
fore, TCG's share of market was about 0.25 percent. From this, it is fair to say that
effective local exchange competition does not exist nationally.

THE FUTURE

Wall Street analysts have projected that TCG's local exchange service revenues
will grow at a compound rate of 40-50 percent over the next ten years ( to the year
2005), resulting in annual revenues in the range of $3.5 to $4.0 billion.

These analysts also project that the entire local exchange market will be worth
$145-150 billion by 2005, implying that TCG's share of the revenue will be in the
range of only 2.3-2.7 percent. The implication is that TCG will not have a "substan-
tial" share of the local exchange market (i.e., in excess of 10 percent), even after
growing 40-50 percent for ten years.

Will other carriers be able to capture a "significant" share of the local exchange
market?

The legislative history of the Telecommunications Act reflects an expectation by
the Congress that the cable television industry may become a significant competitor
of the ILECs because the cable companies have extensive, ubiquitous facilities that
pass an estimated 90 percent of the homes in this country. Cable television compa-
nies have significant ownership interests in TCG and TCG is working with some
cable television companies to trail the technologies that will be required to make
cable television systems capable of carrying basic telephone calls. 1 am optimistic
that these trials will be successful and that the cable television systems will be
transformed, over time, into systems that are capable of competing with the ILEC
networks. However, because this transformation will take considerable time and
considerable investment, I doubt that any facilities-based competitor will have cap-
tured a "significant" share of the market (i.e., more than 10 percent) by the turn
of the century.

However, some carriers may have a substantial revenue stream from the resale
of ILECs services. But, as I mentioned in the hearing, "resale" of ILECs services
does not constitute the kind of competition that provides consumers with a safe-
guard against monopolistic abuses. Indeed, "resellers" are effectively sales agents of
the ILECs, not competitors.

My ultimate conclusion is that a majority of business customers and most residen-
tial consumers will not have an effective choice of facilities-based local exchange car-
riers for the rest of this century.

113

Question 2. Mr. Salsbury and Mr. Atkinson, what percentage of the local exchange
market do your companies expect to achieve in the future? What are your projec-
tions for the next three to five years?

Answer 2. Please see my response to question one, above.

Question 3. Mr. Atkinson, you indicated in your written testimony that Teleport
is the Nation's leading competitive local exchange carrier. How do your local ex-
change service revenues compare to the local exchange revenues of the Bell compa-
nies or GTE?

Answer 3. As explained in my response to question one, above, I estimate that
TCG currently has approximately a 0.25 percent share of the total local tele-
communications market.

Question 4. Please state your view of the assertion that, despite their dominant
position, the Bell companies are not fierce competitors in the marketplace because
they have grown complacent from years of regulation.

Ariswer 4. I totally disagree with this assertion because the Bell companies aren't
really regulated and they aren't complacent.

Today, most of TCG's retail (non-carrier) revenues come from "large business" or-
ganizations. This "large business" sector of the local telecommunications market has
been virtually deregulated in most States for many years. For example, most States
have deregulated private line, Centrex and PBX services or allow ILECs to file "In-
dividual Case Basis" tariffs that are customized for each customer and are not cost-
justified. Where they have been deregulated, the ILECs are generally aggressive
competitors, particularly with respect to prices.

Of course, since the vast majority of the ILECs revenues are NOT currently sub-
ject to any competitive threats, the ILECs' aggressive pricing in the small "competi-
tive" niches is financed by over-pricing — with "regulatory^' acquiescence — the monop-
olized services and over-charging captive consumers.

Responses of Robert C. Atkinson to Questions From Senator Feingold

Question 1. Some competitive local exchange carriers have suggested that it is
very difficult to achieve resolution with FCC and state regulators of performance
and service complaints on interconnection agreements. What system would you es-
tablish to address resolution of service and performance complaints?

Answer 1. TCG is particularly concerned about the inability of traditionally regu-
latory process to address and resolve performance and service quaUty problems as-
sociated with CLEC-ILEC interconnection. This concern is based on years of actual,
real-world experience of being interconnected with ILECs, getting mediocre to awful
performance from the ILEC and being unable to obtain any timely, effective rehef
from the FCC or State PUCs.

The chief reason that the regulators have been unable to resolve the performance
and service problems in a timely fashion is that the ILECs are masters at "gaming"
the regulatory process.

Sec. 251(c)(2XC) of the Telecommunications Act requires ILECs to provide inter-
connection which is at least equal in quality to the interconnection that they provide
to themselves, affiliates and other carriers. This requirement implies some sort of
regular quality reporting by the ILECs since this duty would be meaningless and
unenforceable without comparative data. Assuming that comparative quality data is
regularly available, CLECs would be able to seek damages and possibly injunctive
relief based on "unequal" quahty.

In some interconnections negotiations with some RBOCs, TCG has obtained
agreement on "hquidated damages" so that TCG would obtain some immediate com-
pensation in the event of a serious performance failure by the RBOC. Such liq-
uidated damages avoid the expensive and time consuming effort of seeking damages
through regulatory or judicial process. To be effective, liquidated damages must be
substantial so as to discourage wilful noncompliance.

In the absence of a liquidated damages agreement, TCG would recommend some
sort of alternative dispute resolution (ADR) process to resolve quality and perform-
ance problems, rather than conventional regulatory proceedings.

Question 2. Mr. Barr, representing GTE, commented that one reason to be uncon-
cerned about the proposed RBOC mergers is that the "local bottleneck has been
opened up wide."

I know your company has interconnection agreements with a number of the
RBOCs and is offering local service in a number of urban markets. I also under-
stand that your company has also asked a number of states to arbitrate or mediate
interconnection agreements. Would you comment on how wide open the bottleneck
is based on your experience as a local service provider?

114

Answer 2. Mr. Barr's assertion is quite laughable.

There are two real "local bottlenecks" that constrain the development of effective
local exchange competition, and neither are "wide open": the physical connection be-
tween consumers' premises and a CLECs network (i.e., a "loop bottleneck"); and,
the termination of traffic carried by a CLEC to an ILEC's customer (i.e., a "call com-
pletion bottleneck").

THE LOOP BOTTLENECK

With respect to the "loop bottleneck," CLECs such as TCG would prefer to
NEVER rely on ILEC unbundled loops for this critical path because it is simply un-
acceptable to be so reliant on a powerful competitor that has a 100-year history of
abusing its control of this essential facility. Unfortunately, CLECs are forced to rely
on unbundled ILEC loops for a number of reasons.

One of the most pernicious reasons that CLECs are forced to rely on their ILEC
competitors is landlord's discriminatory demands for outrageous payments from
CLECs. In fact, some commercial and residential landlords simply refuse to allow
CLECs to install their cables and equipment on their premises, making it physically
impossible for the CLEC to have direct access to customers. In other cases, the land-
lords demand such high pajmients for allowing CLECs to access their tenants that
the CLEC is economically prohibited from direct access. This problem is generally
compounded by discrimination resulting from the ILEC's undue bargaining leverage
based on their historic monopoly: ILECs rarely pay landlords to access their tenants
because the ILECs refuse to provide service under such circumstances and landlords
would find it impossible to rent their premises without basic telephone service.

Technological developments, such as telephony over cable television facilities and
"wireless" loops may substantially reduce the "loop bottleneck" at some point in the
future. But additional technological developments and substantial risk capital in-
vestments are necessary and the cost for the new technology must fall dramatically
before they can be considered an operational and economic substitute for the ILEC's
ubiquitous loop networks. Therefore, today and for the immediate near-term, there
is no practical alternative to the ILEC loop for access to the vast majority of tele-
phone consumers and the "loop bottleneck" continues.

It is also important to understand that the Telecommunications Act has had no
practical impact on reducing the "loop bottleneck". The rates for unbundled loops
and the collocation arrangements that are needed by CLECs to use unbundled loops
are uncertain at best and generally too high. As a result of the 8th Circuit's Stay
of the FCC's Interconnection Order, the uncertainty is likely to continue for the fore-
seeable future.

But even pricing unbundled loops "correctly" won't change the "loop bottleneck"
substantially. The point of my testimony before the Committee was that ILEC per-
formance in providing unbundled loops is equally, it not more, important than the
simple price of the unbundled loop, "rhis is because the cost to a CLEC — in terms
of direct out-of-pocket cost as well as the substantial costs associated with establish-
ing and maintaining a good reputation with customers — of a missed installation
date of an unbundled loops or frequent service problems with an unbundled loop are
almost incalculable. We have seen no substantial improvement in ILEC performance
with respect to unbundled loops and, if an5rthing, performance is deteriorating.

THE CALL COMPLETION BOTTLENECK

After a CLEC gets a customer on its network, it must be able to deliver that cus-
tomer's call to any other telephone, particularly to the ILEC's subscribers. Unlike
the "loop bottleneck", there is no foreseeable technological or other solution to the
"call completion bottleneck": CLECs' will be permanently and unavoidably depend-
ent on ILECs for call completion, forever. Congress recognized the unique and per-
manent nature of the "call completion bottleneck" when it established special pric-
ing rules for "Transport and Termination". See, Sec. 252(d)(2). These pricing rules
will result in Transport and Termination (i.e., call completion) being priced at the
absolute lowest possible level of the "reasonable approximation of the additional
costs" incurred by the ILEC to terminate the CLECs traffic.

Contrary to Mr. Barr's assertion, the "call completion bottleneck" not only isn't
"wide open", it probably never will be. Consequently, this bottleneck requires sub-
stantial and strong regulation, probably forever.

Question 3. One of the issues associated with these mergers, particularly with re-
spect to the Bell Atlantic/NYNEX proposal, is whether the RBOCs with adjacent
markets would have had a natural competitive advantage if they chose to compete
with their neighbor. Consumer groups have suggested that as a result of some of
the joint ventures, such as Bell Atlantic/NYNEX Mobile, the joint cellular business

115

operated by the two BOCs, name recognition would be high and competitive oppor-
tunities would exist.

In Mr. Barr's testimony, he suggested that neighboring LECs do not have a com-
petitive advantage over other new entrants into local service.

As a competitor for local service, do you agree with that conclusion? Would MCI
and TCG be concerned if, in one of their local service markets, the neighboring local
exchange carrier chose to enter that market?

Answer 3. I disagree with Mr. Barr's conclusion.

One of the major costs associated with becoming an effective competitive local ex-
change carrier is "brand recognition". In major markets, brand-recognition advertis-
ing could cost tens of thousands (and possibly hundreds of thousands) of dollars per
day, every day, for years. Mass media advertising isn't precise: radio, television and
newspaper ads for one LEG are often viewed outside that carrier's actual service
territory. This is particularly the case in the New York City metropolitan area:
NYNEX's advertising is seen by many Bell Atlantic subscribers and vice versa.
Similarly, in California, Texas, Washington State and Florida, GTE service terri-
tories about RBOC service areas and GTE and the RBOC each have "name recogni-
tion" outside their traditional service areas as the result of advertising to their tra-
ditional customers.

The "free" advertising and name recognition enjoyed by ILECs in areas adjacent
to their traditional service areas gives them a substantial competitive advantage
vis-a-vis "start up" CLECs when it comes to consumers selecting a CLEC. Of course,
interexchange carriers that employ mass media marketing have the same name rec-
ognition advantage vis-a-vis "start up" CLECs as the adjacent ILECs.

[Editor's note: New Paradigm Resources Group, Inc.'s Research Report on: Com-
petitive Telecommunication, dated July 1996, is located in committee files.]

116

Page 8 September 1996

But Implementation Will Be Deviled By The Details

Despite all indications that the major regulatory milestones will be met,
businesses expecting an all-out competitive war soon thereafter will be
disappointed. The technical details and process of tearing down the iron cunain
surrounding the local monopoly will impede instant market opening.

■ Users will grow a beard waiting to switch carriers. Local carrier
switches cannot handle a boatload of orders for call forwarding
arrangements - the interim solution for number ponability -
especially if those requests pile in monthly from firms with hundreds of
lines. True number portability, in which phone numbers can be
rehomed to any carrier, will require a massive overhaul of every
carriers' signaling network and won't begin until 1998.

■ Endless glitches — like lost orders — will be really frustrating.

Ordering local service today kicks off a bevy of events, like feature
setup, installation scheduling, and direaory assistance listing. But
when the responsibiUty is split between the incumbent and its
competitor, botched intercompany communications and manual
processes wUl snarl up even the simplest service requests.

■ Inctunbents will appeal to the courts. Eager to delay competition

in their home regions, some local telcos wall ask the court to overturn
the FCC. While these challenges will get heard and slowdown the
opening of markets, we believe they v«ll not massively reverse the tidal
wave of change already unleashed by Congress.

■ Competitors will resist cooperation. Businesses that try to mix and

match AT&Ts Call Prompter with Bell Adantic's Toll Free service will
get "no" for an answer. Why? Neither player will want to share
business vAxh the other which The Act doesn't require. Advanced
services like Web hosting, call center routing, and network
management will remain off-limits for one-stop shopping.

• Workers will stress out on the job. Layoffs are already rippling
through the telco ranks. More are sure to follow. Disgrunried
employees will rebel against the shakeout by slowdng down work
orders, going on strike, or forcing politicians to erect new barriers by
second-guessing regulators.

117

September 1996

Page

New Access
Technolojnes

38Ghz

microwave

Inverse
multiplexing

/*!

Key facts

■ Bypasses ceico landline TIs

■ Great for path diversity

■ Limited by line-of-sight

' Multiple T I s made into large

chunks of conuguous bandwidth
' Speeds between I S and 45 Mbps
' Needs matching equipment at
customer and carrier sites

■ Smashes voice, video, and data bits
together for bandwidth economies

> Runs best at DS3 speed

■ Expensive, complex, unproven

' "Digital subscriber line" reuses
existing copper wires

■ IS to 6 Mbps carrier service

■ Many incompatible versions

■ Immature equipment market

Availability and price

• Start-up vendors:
ART. BizTel. WinStar

■ About 20% less than
landline TIs

■ Leading equipment vendors:
ADC Kentrox. Digital Link.
Larse. Venlink

• Regular monthly cost 'or
Tl plus $8,000 per box

■ In early deployment by
RBOCs. GTE. and
competitors

• About 20% more than
regular circuits

■ Currently in trial at
Ameritech. Pacific Bell.
and U S West

• Prices still hazy

($50 to $ 1 .000/month)

Source: Forrester Research, Inc.

Quality and timeliness will drop like a stone. Lacking systems
depth to handle their new role as wholesalers, local telcos will
misplace orders and transfigure customer data as competitors pump
thousands of requests into their systems monthly. Compounding the
pain, continued layoffs will thin the ranks of experienced technicians
and stress those still employed. Evidence of RBOC quality degradation
is already apparent -- witness the recent multimillion dollar fines
against NY^fEX and U S West for failure to meet regulators' goals.

Local loop demand will outstrip supply. As carriers acquire more
traffic types from each customer site, the break-even for higher-speed
dedicated access lines wiU be more easily met. Plus, as businesses
increasingly use wide area networks to reach out to customers,
demand for Internet access wall soar (see the August, 1996 Telecom
Strategies Report, "Sizing Internet Services"). But local telco plant
upgrades will not keep pace with the surge.

Reproduction Prohibited

118

RESPONSES

PETER W. HUBER

Senior Fellow, Manhattan Institute

Responses Submitted October 16, 1996

Hearing on "Mergers and Competition in the

Telecommunications Industry"

Senate Judiciary Committee

Chairman: Senator Orrin G. Hatch

September 11, 1996

Senator Hatch's Questions

1. The most notable market trend during the next five years
will be the bundling of all telecommunications services into a
single package. By the year 2001, four or five companies will be
selling one-stop, integrated, end-to-end phone service to end users
in most major markets. AT&T, MCI, and Sprint will leverage their
existing long-distance facilities and large customer bases by
bundling down from their national long-distance networks into the
heart of the local exchange, using both wireline and wireless
technology. Every major wireless entity will be allied in some way
with a favored long distance carrier, if only as a reseller. Every
major long distance carrier will be linked in some way to a
wireless carrier, either as an equity owner of facilities or as a
reseller. Vertical integration will be the dominant trend in
markets for information services and video too.

2 . Past experience gives us some indication of how quickly
markets are likely to grow. Output in markets for long-distance
and wireless service, and for customer premises equipment, grew
very rapidly after those markets were opened to competition. In
long-distance, for example, AT&T's revenues and profits over the
last decade have remained relatively stable, even as AT&T's market
share has declined.

I believe there is little real possibility of the telecom
industry growing more concentrated in the next few years. Even
allowing for mergers, either already announced or that we can
plausibly anticipate.

3. Telecom markets are going global. All major players in
the industry are forging international alliances with very large
players from abroad -- British Telecom, Deutsche Telecom, France
Telecom, Canadian companies, and others. The Bell Atlantic/NYNEX
and SBC/Pactel mergers will create entities that are capable of
forming international alliances comparable to the ones already
being built by AT&T, MCI, Sprint, and their partners from abroad.
Figure 1 .

119

Figure 1

International Alliances

AT&T Sprint-FT

WorldPartners DBT

Bell Atlantic/
NYNEX

4. The most likely competitors in the local exchange are
those companies that already have facilities and a large customer
base. These are primarily Competitive Access Providers (CAPs) ,
cable companies and the largest long-distance carriers. Market
analysts have stressed the importance of the "in-the-ground local
networks (we call them 'desperately sought assets') to the success
of the competitive local exchange carriers (CLECs)"' MPS, a lead-
ing CAP, has concluded that its local networks are "the right
assets, at the right place, at the right time."^ Cable companies
have been described as "[t]he most obvious facility-based competi-
tor [s]" in the local exchange due in part to their "extensive and
relatively modern infrastructure of fiber optic and coaxial cable

' Reingold, D., et al, Merrill Lynch, Aug. 6, 1996, Rept. No
1770668. Merrill Lynch had earlier stated that "[i]t is clear that
those potential local competitors who have more network facilities
deeper into the network and who have to only lease commodity
transmission from the Bells are clearly more likely to obtain a
higher margin on their local business. Grubman, J.B., et al,
Salomon Bros. Jan. 1, 1996 Rept. No. 1679303.

^ MPS 1995 Annual Report (1996) p. 15.

- 2 -

120

in place."' Bob Allen, AT&T's CEO, explained how his company could
quickly enter the local exchange as a facilities-based competitor:
"Currently, a substantial number of the lines serving customers
from AT&T's digital switching centers are directly connected to
business customers' offices. . AT&T need only make software
adjustments and establish links to local switches in order to allow
these direct connections -- now used only for long distance --to
handle local traffic as well."*

Many analysts, including market participants themselves,
recognize that these national companies also possess marketing
advantages over smaller, regional carriers. In its Annual Report,
Sprint pointed to the advantages that the "national scope of the
Sprint brand" gave it in the emerging marketplace.' Perhaps
uniquely, AT&T benefits both from current and historical advertis-
ing; surveys have consistently shown that anywhere between 3 and
60 percent of the people in the U.S. still think AT&T is their
local phone company.' A recent Yankee Group study found that
almost 50 percent of the respondents said if they could get local
and long distance service from the same carrier, they would select
AT&T. Nobody else had more than a 6 percent share.'' Robert Allen,
AT&T's CEO, has predicted that his company "can win at least a
third of [the local] market over the next 5 to 10 years."' In my
view, these predictions are well within the realm of possibility.

An examination of state CLEC certifications confirms the
importance of facilities, the ability to offer service bundles and
an established user base. CAPs, with their in-place local
networks, account for nearly 30 percent of the companies seeking
local competitor status. Long-distance companies, which are

' Robert A. Beizer and Emried D. Cole, Jr., When Local
Exchange Competition Calls: A Survey of Competitive Local Exchange
Access Issues.

' AT&T News Release, AT&T's Allen Outlines Plans to Enter
Local Telephone Market, Feb. 8, 1996.

' Sprint 1995 Annual Report, Pg 5.

' Joseph P. Nacchio, Executive Vice President, Consumer and
Small Business Division. Keeping the Customers Satisfied, speech
before the Morgan Stanley Conference, New York, NY, Feb. 13, 1996.
(http: //www. at t .com/news/speeches/96/960213 . jna.html) .

' Robert E. Allen, Chairman and CEO, AT&T, Remarks delivered
at a news conference, Washington, D.C., February 8, 1996 (As
prepared for delivery) , http://www.att.com/news/speeches/96/960208.
raa . html .

- 3 -

121

expected to bundle their existing offerings with their planned
local services, make up roughly 20 percent of the companies seeking
competitive entry. As a group, long-distance companies are
ambitious in their geographic reach, accounting for nearly 30
percent of state certifications with the four national facilities-
based carriers' accounting for over half of all long-distance
carrier CLEC certifications.'" Nearly 15 percent of new competitors
are either cable or wireless companies. Tables 1 and 2.

Table 1 1

CLEC/CAP Con^anies 1

Core Business

Number

Percent

CAP

29.5

Long Distance

21.3

Wireless

7.7

Cable

6.3

LEC

3.9

Other

31.4

Total

207

Table 2

CLEC/CAP Certifications

Core Business of
Provider

Number

Percent

CAP

279

41.2

Long Distance

198

29.2

wireless

7.5

Cable

8.0

LEC

1.8

Other

12.3

Total

677

AT&T, MCI, Sprint, and LDDS WorldCom.

" AT&T has received, or is seeking, CLEC status in all 50
states .

122

Senator Thurmond 's Questions

1. I generally concur with the predictions made by long-
distance carriers, CAPs, and cable concerns, about the prospects
for local exchange competition. (See my earlier answers given in
response to Senator Hatch.)

As to whether or not it is "certain" that robust competition
will develop: No, nothing is ever certain in any free market, least
of all a market in which technology is changing so quickly. But
competition has increased and prospered in every other telecom
market that has been opened to competition -- customer-premises
equipment, central-office equipment, inside wiring, long-distance,
wireless, on-line services, and so forth. I do not believe that the
local exchange will be the one market in which competition fails.

2. As I indicated earlier, in response to Senator Hatch, the
most notable trend during the next few years will be the bundling
of previously separate services. Large, vertically integrated
providers will serve the industry's main segments.

3. The final answer to this question depends not on what
Bell Companies do or don't do, but on regulators. I would hope
that Bell Companies not only meet the checklist but also succeed in
persuading regulators and the courts that they have done so, within
the next two years . But given the languid pace of regulatory
review and legal challenges, delays are possible.

- 5

123

Senator Leahy's Questions

1. The 1996 Telecommunications Act contains provisions that
specifically address the interplay between the antitrust laws and
the FCC's regulatory responsibilities. The Act somewhat expanded
the reach of the antitrust laws. It repealed section 221(a) of the
Communications Act, which previously permitted local phone
companies to merge without facing antitrust scrutiny if the FCC
approved." In other respects, the 1996 Act left existing antitrust
laws unchanged." All major telecom mergers will now go through
standard Hart-Scott-Rodino review." " [0] ne of the underlying
themes of the bill," the conference statement declares, is to get
both the FCC and the Department of Justice "back to their proper
roles . ""

There is no reason for the FCC or state regulators to attempt
to reinvent or rewrite law so recently considered, and so over-
whelmingly approved, by Congress. Congress could have created the
linkage that your question suggests, in the 1996 Act. But Congress
didn ' t .

2 . The whole point of price cap regulation is to give phone
companies the incentive to find creative new ways to make their
operations more efficient. Well -conceived mergers are one way to
create new efficiencies. It would be unconscionable for regulators
suddenly to discover, long after a price-cap deal was put in place,
that they didn't mean that kind of efficiency. Regulatory flip
flops of that character would simply destroy the credibility of
price-cap regulatory programs.

The most certain way to ensure that savings flow through to
consumers is to step out of the way of competition. Competitive
markets pass savings through to consumers. Over- regulated monopo-
lies don't.

3. No. The mergers combine geographically discrete markets.
The merging companies start with no share at all in the interLATA
toll markets, either inside or outside their territories.

" The Commission was empowered to immunize mergers from "any
Act or Acts of Congress making the proposed transaction unlawful."
Communications Act of 1934 § 221(a) (codified at 47 U.S.C.
§ 221(a)) .

" Telecommunications Act of 1996 § 601(b)(1). ("Except as
provided in paragraphs (2) and (3) , nothing in this Act or the
amendments made by this Act shall be construed to modify, impair or
supersede the applicability of any antitrust laws.").

" 15 U.S.C. A. § 18a.

^* Conference Report at 201.

124

Responses of Robert W. Crandall to Questions From Senator Hatch

Answer 1. My testimony was that I cannot predict the future of the telecommuni-
cations industry for two years: (1) the current prices and service levels have been
so distorted by regulation that they are not a very good basis for making predictions
for an industry in which competition largely dictates prices and service levels; and
(2) the rate of technical progress is so rapid that the mix of wireless and wireline
technologies and corresponding services are very difficult to predict. Nevertheless,
one might hazard a guess that in five years there will be far more wireless competi-
tion in all telecommunications services, but that switched broadband services over
wireline companies may only be developing at that time. The key issue is whether
the current local telephone companies, cable companies, long-distance companies, or
other new entrants will build them. I cannot predict who the winnerts) will be.

Answer 2. The rate of growth of telecommunications will depend largely on the
speed with which artificial regulatory structures prevent entry and keep the rates
for price-sensitive services artificially high. If legal and regulatory battles over the
implementation of the 1996 Act persist for several years, growth will be restrained.
Otherwise, the growth in output could be considerably above 10 percent per year
until an economic recession occurs. The market shares of large telecommunications
companies will depend more on technology, regulation, and entrepreneurial abilities
of the players than on the growth of the market. I am not concerned that we are
likely to have highly concentrated markets if regulators indeed step aside and allow
competition to work.

Answer 3. I do not think that mergers among large telecommunications carriers
are required for these companies to compete in international markets or in other
national markets.

Answer 4. At this point, I think that most of the competition in the next five years
will come from wireless carriers, but I remind you of my answer to #1 above. Pre-
dictions in this sector are risky indeed.

Thank you for offering me the opportunity to share my view with you and your
staff. I welcome any further questions that you may have.

Responses of Ron Binz to Questions From Senator Hatch

Question 1. One of the purposes of this hearing is for the Committee to take a
"snapshot" of competition in the telecommunications industry today. Can you briefly
project into the future and tell us what you think a snapshot of the industry will
look like 5 years from now?

Answer 1. I believe that the future outlook for competition in the telecommuni-
cations industry is murky. Congress took great strides toward eliminating many of
the legal barriers to competition in passing the Telecommunications Act of 1996. At
this stage, however, it is uncertain whether the goals of that legislation will be
achieved. The least competitive market in the telecommunications industry today is
the market for local exchange telephone service. Whether competition develops for
local telephone service in the next five years depends to a great extent on decisions
to be made in the near future at the FCC, in state regulatory bodies and in the
courts.

The markets for long distance service, telephone equipment, satellite services, and
information services are relatively competitive today compared to the local telephone
market, although none of these markets could be described as "perfectly competi-
tive". The strength of competition in these markets in the next five years depends
upon whether the major players in these industry sectors continue to consolidate.

Question 2. How rapidly do you believe the telecommunications industry will grow
in the next five years? Is it possible that, even while these mergers will create larg-
er entities, their market share in the telecommunications industry in fact will not
grow appreciably in the coming years? What are the realistic possibilities that the
telecommunications industry is becoming too concentrated?

Answer 2. As a whole, the telecommunications industry appears to be growing
faster than the rest of the economy. Lower prices and services innovation, brought
about in part by increasing competition, have stimulated tremendous growth in de-
mand for telecommunications services. The telecommunications industry is likely to
continue to grow over the next five years. In general, however, the market for local
telephone service is growing at a slower pace than the rest of the telecommuni-
cations industry. For instance, the number of basic telephone lines provided by local
telephone companies typically grows about 3-5% per year, while long distance usage
tends to expand about 7-10% per year.

Whether mergers will lead to greater market share depends upon the particular
merger and the particular market. The mergers of Bell Atlantic-NYNEX and SBC-

125

PacTel are not likely to lead to an increase in the market shares of these companies
over local telephone service because, in the regions they serve, these companies have
virtually 99% of this market already.

Whether the markets for telecommunications services become too concentrated de-
pends largely upon whether new entrants are given the opportunities to compete.
We are certain to see greater consolidation among the existing industry players over
the next few years. This increasing concentration needs to be balanced by measures
that allow innovators and entrepreneurs to enter these markets in order to protect
consumers from monopolistic or oligopolistic behavior.

Question 3. How important do your think these mergers are to make American
companies compete on a global basis?

Answer 3. I believe that the companies involved in the Bell Atlantic-NYNEX and
SBC-PacTel mergers overstate the effect of these mergers on global competition.
American firms, in general, are achieving significant success in foreign markets
today. Almost every one of the Regional Bell Operating Companies has invested
heavily in cellular and cable systems in Europe and Asia. The biggest hurdles facing
many American corporations are trade barriers that keep American firms, both com-
petitive firms and monopolies, out of foreign markets. Furthermore, it would be a
dangerous policy for the United States to sacrifice the interests of American con-
sumers by allowing domestic companies to strengthen their monopolies at home sim-
ply to gain advantages in overseas markets.

Question 4. Who do you think will be the most effective competitors in the local
exchange market? How much market share do you think non-incumbent local ex-
change carriers will be able to gain?

Answer 4. It is too soon to know what companies will be the most effective com-
petitors in the local exchange markets. Each of the potential competitors has advan-
tages and disadvantages. Cable companies have wires to over 95% of American
homes, but they do not have switching or two-way capabilities. Cellular and Per-
sonal Communications Services companies do not need to lay wires to every home,
but they must construct and deploy thousands of antennas, and their spectrum does
not yet provide them vsath enough capacity to serve large amounts of traffic. Long
distance companies have a certain amount of name recognition, but they will need
to use the facilities of the incumbent telephone companies for some time until they
can build their own local networks. The virtue of the Telecommunications Act of
1996 is that it does not attempt to pick winners and losers but instead requires the
regulators to enforce competitively neutral rules that will allow the most efficient
providers to succeed.

More important than the question of market share is the question of market
power. Market power depends upon many factors, including ease of competitive
entry and price elasticity, in addition to market share. I believe that it will be quite
some time before the incumbent local exchange companies lose their market power.

Responses of Ron Binz to Questions From Senator Thurmond

Question 1. Please state your views of concerns raised about whether effective
local competition will ever develop for business and residential customers, despite
the best efforts of the Congress. While many large companies are currently inter-
ested in entry, is it certain that robust local competition ultimately will be achieved?

Answer 1. No, it is not certain that robust local competition will be achieved, espe-
cially for residential customers. There is little doubt that consumers want competi-
tive alternatives, but it is not clear whether competitors will be able to overcome
the significant technical and regulatory hurdles that can impede their ability to
enter the local markets. Whether robust local competition develops depends to a
great extent on decisions that wdll be made by federal and state regulators over the
next few years.

Question 2. As I stated in my opening statement, I am interested in views about
how competition in local exchange and long distance services may develop over the
next few years, and particularly your estimates of the number of likely competitors
with substantial shares of those markets. Would each of you please comment?

Answer 2. The interstate long distance market is fairly competitive today, with
over 400 regional and national carriers currently providing service. This market is
likely to become more competitive in the future, as recent evidence shows that the
smaller long distance companies are growing faster than the bigger carriers. The
intrastate long distance market is less competitive, in part because many states do
not yet require intraLATA toll diahng parity for instrastate service. The lack of
intraLATA toll dialing parity gives a tremendous advantage to the Regional Bell
Operating Companies over intraLATA toll calls. Once states permit intraLATA com-

126

petition, and permit intraLATA toll dialing parity, the intraLATA toll market is also
likely to become more competitive.

The development of competition in the local exchange market is more problematic.
Over the next five years, I believe that a number of cable companies, wireless com-
panies, long distance companies, and resellers are likely to attempt to enter the
local market. Whether they will be successful is hard to predict at this time.

Question 3. When do each of you expect the Bell companies to meet the statutory
requirements and begin offering inter-LATA long distance service in the states in
their own regions?

Answer 3. I understand that Ameritech is planning to file applications to provide
interLATA service in at least two of its states before the end of this year, and that
NYNEX may apply in one or two of its states early in 1997. Whether the carriers'
plans to apply for interLATA service have changed as a result of the stay of the
FCC's rules is too early to know. I believe, however, that the stay of the FCC's rules
in the 8th Circuit Court of Appeals makes it much less likely that the FCC will
have the statutory authority to approve these applications. Section 271 of the Tele-
communications Act requires that RBOC to satisfy the "competitive checklist",
which are, in part, determined by the FCC's rules. It will be difficult to know wheth-
er the RBOCs have complied vdth the FCC's rules until we know what the rules
are.

Beyond this, there appears to be much work ahead of the RBOCs before their ap-
plications to provide interLATA service could be approved. The RBOCs must "fully
implement" interconnection agreements that satisfy the 14-point competitive check-
list, yet it is not clear that any of the RBOCs have done so at this time. Further,
the RBOCs must face facilities-based competition from a competitor serving busi-
ness and residential subscribers. I do not know of any residential consumer who has
a choice of a competitive local exchange company today, much less a facilities-based
competitor.

Finally, it is worth mentioning that whether the RBOCs are able to provide
interLATA service inside their regions depends to a great extent on their own ac-
tions. The sooner the RBOCs unbundle their networks on a non-discriminatory
basis, at cost-based rates, the sooner they will be able to provide interLATA service.

Question 4. Mr. Binz, you suggested in your written testimony that the Bell merg-
ers should be conditioned on the Bells first satisfying the checklist found in Section
271 of the Telecommunications Act. In your view, who has the legal authority to
impose such a requirement?

Answer 4. First, I would like to clarify that CPI believes the RBOCs should meet
the competitive checklist not simply in one state, but in every state in which they
are the incumbent provider of local exchange service today, before the mergers are
approved. Regulators may also wish to condition their approval of the mergers on
other consumer benefits, such as flowing through cost efficiencies of the mergers to
consigners.

I believe that several parties have the legal authority to impose the competitive
checklist as a precondition to approval of the mergers. The Department of Justice
could enter into a settlement agreement with the RBOCs under which the Depart-
ment would recommend that the court approve the mergers if the RBOCs agree to
meet the checklist in each state. If no settlement is reached, the Department could
bring an action under the antitrust laws, and the court hearing the case could de-
cide on its own to require implementation of the checklist as a precondition to ap-
proving the mergers. The Federal Communications Commission, under its authority
to enforce the broad "public interest" standard of the Communications Act, could re-
quire the checklist to be implemented before giving its approval. Some states, such
as California, have broad statutory authority to consider measures such as the
checklist requirement in the process of considering the mergers. Finally, of course,
the U.S. Congress has the authority to impose such a condition.

Question 5. Mr. Binz and Mr. Hatfield, what is yoiu- response to the argument
that there was no particular reason for initially dividing the Bell System into seven
Bell operating companies instead of five, so there should be no objection now to the
proposed consolidations?

Answer 5. At the time the court was considering the divestiture, the local ex-
change business was viewed as a natural monopoly. There was little expectation at
the time that the market for local exchange telephone service could become competi-
tive. Now that the local exchange market is on the verge of becoming competitive,
there is little economic or policy sense to allow the incumbent local exchange compa-
nies to strengthen without taking countervailing measures to strengthen competi-
tive opportunities.

127

Responses op^ Ron Binz to Questions From Senator Leahy

Question 1. Would conditioning approval of the pending mergers between the Bell
Companies on those companies meeting the "competitive checklist" contained in the
Telecommunications Act of 1996 for each of the States in which they operate today,
help assure that resources continue to be directed first to opening up the local loop
and then the mergers?

Answer 1. CPI has no desire to delay the mergers simply for the purposes of
delay. CPI believes that the mergers threaten the growth of competition for local
telephone service. This threat must be balanced by measures to promote competi-
tion. The idea behind the "checklist precondition" is to ensure that the RBOCs open
the local loop to competition. The RBOCs should employ whatever resources are nec-
essary to ensure that the checklist preconditions are met before the mergers are ap-
proved.

Question 2. Should regulators insist that operating efficiencies resulting from the
mergers between the Bell Companies be passed along to ratepayers, particularly in
those States with price cap regulation? If so, how can regulators ensure that rate-
payers get the benefit of these cost savings?

Answer 2. Regulators should insist that an equitable share of the cost efficiencies
from the mergers be flowed through to consumer in both rate of retxu-n and price
cap States. These cost efficiencies can be flowed through in several ways, including
rate refunds or reductions in future rates.

Question 3. Under the Telecommunications Act, the Justice Department has a
major consultative role in the FCC's decision on a Bell Company's application for
entry into the in-region long distance market, although the Department's comments
"shall not have any preclusive effect" on that decision. [47 U.S.C. Section
271(d)(2)(A)]. Do you think the pending mergers between the Bell Companies, if ap-
proved, should have any effect on the Justice Department and FCC's evaluation of
an application by one of the merged Bell Companies for entry into long distance
service in their new combined territories? Could you explain why?

Answer 3. First, there is no question that both the Justice Department and the
FCC have the legal authority to consider the effect of mergers on the Bell Compa-
nies' long distance applications. The legislation allows the Justice Department to
evaluate the applications under any standard it beheves is appropriate, and the
FCC's public interest standard is very broad. CPI believes that the mergers increase
the companies' ability and incentive to engage in anticompetitive activity against
local exchange competitors. CPI thus believes that the mergers should be one of sev-
eral factors that inform the views of the Department and the FCC when considering
the companies' long distance applications.

Additional Submissions for the Record

Prepared Statement of Judy Brewer, Massachusetts Assistive Technology

Partnership Center

Thank you for this opportunity to submit written testimony in the issue of "Merg-
ers and Competition for the Telecommunications Industry."

As Project Director of the Massachusetts Assistive Technology Partnership
(MATP) I am keenly aware of the benefits of technology for people with disabilities.
I am also aware of the impact in the lives of people with disabilities when there
are barriers to the use of technology, due to lack of vigilance in the design and de-
velopment process. The MATP is one of 56 federally funded Tech Act Projects which
promote increased access to assistive technology for people with disabilities through
a variety of consumer-response, systems change activities including public aware-
ness, information and referral, training, technical assistance, and particularly policy
development and advocacy.

MATP staff have been active in areas of accessible information technology on the
state and national levels. We have been active in advocating for accessible informa-
tion kiosks; negotiating with Microsoft Corporation regarding the accessibility of its
Windows 95 and Windows NT operating systems; working with the General Services
Administration's Center for Information Technology Accommodation on the develop-
ment of accessibility performance benchmark testing; serving on the National Coun-
cil of Disability Tech^X'^atch Task Force, NYNEX's Consumer Advisory Panel for New
England, and the Board of the Adaptive Environments Center, and serving as co-
chair of the Compliance Subcommittee of the Telecommunications Access Advisory
Committee, which is developing recommendations for the telecommunications equip-
ment accessibihty guidelines as required by Section 255 of the Telecommunications
Act of 1996.

The disability community has become actively involved in the Telecommunications
Act of 1996 regulatory proceedings and is watching with interest industry's post-leg-
islation activities. In particular, being located in Massachusetts, our constituents
are interested in the NYNEX and Bell Atlantic merger. The MATP looks to the
NYNEX-Bell Atlantic merger as an opportunity for the "best access practices" of
both companies to be combined in the new Bell Atlantic.

Over the years the MATP has worked closely writh NYNEX on accessibility issues
and we are pleased with its progress. NYNEX has taken a lead in making products
and services accessible for people with disabiUties. It is one of the first companies
to adopt universal design principles which lay the groundwork for the development
and deployment of accessible telecommunications. These principles state that
NYNEX will (paraphrased):

Provide quality services that can reasonably accommodate a broad range of
diverse users, including individuals with disabilities;

Review its existing services to determine which services should be made more
accessible;

Design and develop its services, to the extent readily achievable, so as to be
accessible to a broad range of diverse users;

Market and provide its services in a manner consistent with accessibility by
a broad range of diverse users;

Employ these universal design principles company-wide, in its relationships
with customers, employees, shareholders and suppliers; and encourage compa-
nies related to but not controlled by NYNEX to adopt these principles.
NYNEX has established very active consumer advisory panels in New England
and in New York. In Massachusetts, NYNEX established the Center for Individuals
with Disabilities which administers the state-wide equipment distribution program.
In addition NYNEX has taken the lead in closed captioning of all of its television
advertisements.

(128)

129

NYNEX serves on the Telecommunications Access Advisory Committee under the
Architectural and Transportation Barriers Compliance Board (Access Board), which
will develop recommendations for guidelines for accessible telecommunications
equipment and customers premises equipment.

The MATP would be supportive of a "new" Bell Atlantic which integrates
NYNEX's present activities and commitment to accessible telecommunications prod-
ucts and services for people with disabilities which include:

The "new" Bell Atlantic's adoption and integration of the NYNEX universal
design principles;

Support for the establishment of telecommunications equipment distribution
programs in the "new" Bell Atlantic states;

Creation of universal design committees and consumer panels to provide es-
sential consumer input;

Closed captioning of all "new" Bell Atlantic advertising;

An expansion of NYNEX and Bell Atlantic products and services which are
already accessible and usable by people v*dth disabilities.
There is an opportunity for the "new" Bell Atlantic to build on NYNEX's and Bell
Atlantic's strengths, and to become the leader in accessible telecommunications for
people with disabilities. The Massachusetts Assistive Technology Partnership looks
forward to meeting with NYNEX and Bell Atlantic to discuss now we can work to-
gether to make this happen.

Prepared Statement of Dr. Barbara O'Connor, California State University,
Department of Communications Studies

SUMMARY

Mergers in the telecommunications industry are driven by technological advances
and the removal of regulatory barriers that have hampered competition. They are,
of themselves, neither good nor bad: they are a business-driven response to competi-
tion in an exploding industry.

Because mergers are subject to review by various federal and state agencies, how-
ever, mergers provide policy makers with an opportunity to promote the public in-
terest. This interest will be well-served if the following points are taken into consid-
eration:

Mergers allow two companies to combine resources and customer bases to
gain broader efficiencies. These gains should lead to increased investment in ad-
vanced network infrastructure and the resvilting introduction of new services at
costs that are attractive to consumers.

The proposed mergers, between Bell Atlantic and NYNEX and between SBC
and Pacific Telesis, are of particular interest to consumers. These companies
represent the primary access point to the local switched network, and thus the
"information superhighway," in the near-term future for the consimiers in their
regions. Because no other competitor has announced plans to launch a univer-
sal, facilities-based competitive drive for these customers, it is in the consumers'
interest for these local exchange carriers to remain successful, competitive busi-
nesses.

New companies will adopt the best management practices of the merging
partners; they should also adopt the best consumer and pubHc interest practices
of their former entities.
Given these points, policy makers should adopt two strategies when considering
mergers in the telecommunications industry. First, they should do what they can
to assure that merging companies adopt the best consumer and public interest prac-
tices of their merged partners. Second, they should encourage regulators to establish
explicit service standards that any provider would have to meet and then follow
through qviickly and effectively on failures to meet those standards. This includes
timely regulator responses to individual consiuner complaints.

My name is Dr. Barbara O'Connor. I am a Professor of Communications at the
California State University, Sacramento, where I also direct the Institute for the
Study of Politics and Media. I am also the founding Chair of the Alliance for Public
Technology, a nonprofit public interest group that promotes access to affordable and
useful information and communications services and technologies for all people. Fur-
ther, I am a member of the Federal Communications Commission's Network Reli-
ability Council and a member of Bellcore's Advisory Board.

I have prepared this testimony to provide this Committee with a consiuner per-
spective on mergers and competition within the telecommunications industry. Merg-
ers are a natural outcome of the technological convergence among telecommuni-

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cations industries that we previously saw as distinct: television, cable, telephony,
electronic online communications, etc. With digitization, these distinctions have
blurred, and companies operating in one industry have naturally begun to look at
the others as potential new marketplaces.

With the Telecommunications Act of 1996, Congress established a pohcy frame-
work to allow competition to occur as freely and fairly as possible. They did so with
the explicit expectation that consumers would benefit — from new services that
would be universally available at affordable prices. They emphasized the importance
of universality, and included special considerations for people with disabilities, low-
income consumers, libraries, schools, and museums.

I do not believe that large corporate mergers, in and of themselves, are a threat
to consumer interests. In fact, by improving efficiencies and combining the best
practices of the merging firms, mergers can benefit consumers with lower prices, a
wider array of services, and better programs for serving various consumers with
special needs. Policy makers can help assure that these benefits are realized by:

Using their leverage, where possible, to make sure that the new companies

adopt the best consvuner and public interest practices of their merged partners;

and
Encouraging regulators to establish explicit service standards and follow

through quickly and effectively on failures to meet those standards.

I. Mergers can benefit consumers

Mergers of large telecommunications companies are driven by technological con-
vergence — the fact that all kinds of messages can now be digitized — and by compa-
nies' attempts to protect their core markets while entering new markets. Mergers
allow companies to combine their resources, attain efficiencies of scale and scope,
and broaden their customer base. The Telecommunications Act of 1996 removed
legal and regulatory barriers against entry into new lines of business, which gave
further impetus to mergers. For example, the widely-respected Yankee Group de-
scribed the proposed merger between Bell Atlantic and NYNEX this way:

"The New York- Washington, D.C. business corridor can essentially be viewed as
a single marketplace, and the constraints on companies serving the telecommuni-
cations needs of this marketplace were artificially erected by regulation. Absent that
regulation, a partnership between these two companies was an obvious step to cap-
italize on this market."^

In the proposed merger. Bell Atlantic and NYNEX estimate they will save at least
$600 million dollars annually due to infrastructure consolidation and the initial re-
duction of 3,000 redundant management and administrative jobs.

These savings, and the merged companies' combined ability to attract financing,
should allow them to keep prices affordable, and make significant new investment
in infrastructure and in R&D. According to investment analyst Jeffrey Kagan of
Kagan Telecom Associates in Marietta, Georgia, the merger could produce econo-
mies of scale that could translate into benefits for consumers. ^ As an example, the
1995 merger of Bell Atlantic and NYNEX's wireless operation brought a 21% reduc-
tion in cash expense per subscriber within one year, the lowest in the industry. ^

Mergers can also benefit consvuners by sharing the partners' complementary
strengths. In the proposed merger between SBC and Pacific Telesis, for example,
SBC customers could benefit from Pacific Telesis's leadership among the Bell Oper-
ating Companies in Internet services. Pacific Telesis will benefit from SBC's strong
financial position following the decrease in their operating revenue from the spin-
off of their cellular properties in 1994.-*

These benefits are especially striking when one considers one of the outstanding
consumer-related programs that could be expanded in the proposed mergers. Pacific
Bell, for example, has a Telecommunications Consumer Advisory Panel (TCAP) that
has become a very effective way for the company to stay in touch with California's
diverse customer base. TCAP members include respected community leaders who
give Pacific Bell input on various public policy decisions. The TCAP is also a vehicle
for communication on telecommunications issues back to the consumer community
in California. If the proposed merger between SBC and Pacific Telesis occurs, this
program could benefit the consumer community in SBC's states if it is adopted and
expanded by the new company.

* Yankee Group, "Consumer Communications White Paper," v. 13, n. 12, April.

2 Phil Waga, "NYNEX Merger: No Dollars for Dialers," Westchester Today, April 1996.

3 Bell Atlantic News Release, "Bell Atlantic First Quarter Net Up 13.5 Percent," April 18,
1996.

■* Yankee Group, "Consumer Communications White Paf)er," v. 13, n. 11, May 1996.

131

Similar opportunities exist in the proposed Bell Atlantic-NYNEX merger. The
Massachusetts Assistive Technology Partnership Center, for example, has had a
wonderfully productive relationship with NYNEX, resulting in NYNEX's adoption of
"universal design" principles and a commitment to make their products and services
accessible to all people, regardless of disability. This leadership should benefit the
"new" Bell Atlantic's customers, as well. These examples help show why policy mak-
ers should do what they can to assure that such model programs are sustained and
expanded when telecommunications companies merge.

//. Some consumer concerns

The major issue raised in policy circles by a merger is competition: is the merger
anti-competitive? This concern is presented as a consumer concern, given that a re-
duction in competition would deprive consumers of competitions benefits. For this
reason, mergers involving local exchange companies undergo extensive review by
the Department of Justice. I am confident in that agency's ability to identify and
resolve antitrust issues, just as it does in other industries.

Ironically, when I actually talk to consumers, their concerns are not focused on
the issue of competition. They look, rather, at the specifies of their service: price and
access to service, readability of their bills, service offering, customer service, the res-
olution of complaints, etc. In general, I think mergers can have positive effects on
these elements. Price and access to service. Foremost for many consumers is the
issue of price and access to service. In the case of merges involving local exchange
carriers, this issue is confounded by the ongoing question of how the costs of the
public telephone network should be allocated, regardless of a merger.

No matter what one's position on that question, people seem to agree that for the
foreseeable future, the public telephone network operated by existing local exchange
carriers will be the only universal infrastructure for access to telephone and data
services for residences. Other companies that are planning facilities-based competi-
tion are focusing on high-density markets; they will not provide universal service
in the near future. For this reason, it is paramount that local exchange carriers con-
tinue to be viable, competitive businesses; even their competitors rely on the exist-
ing local exchange infrastructure. If a merger makes business sense (for example,
in the eyes of the business press and financial analysts), it can also make sense for
the companies's customers.

There are so many factors that will affect the prices and availability of tele-
communications services that we will never know for sure which is better for con-
sumers: merged companies or independent companies. In this environment, it is vi-
tally important that policy makers set standards for telecommunications providers,
then focus their energies on assuring that those standards are met, not on mandat-
ing how they are met. In local exchange service, this means estabUshing an evolving
definition of universal service, and setting up an equitable way for sustaining that
level of service.

Company responsiveness. — Mergers sometimes raise consumers' concerns that the
management of the merged telecommunications company will be further away, and
thus less responsive to their needs. While this may have been a legitimate concern
when companies first started consolidating and closing local branches, it has not
been a significant factor in telecommunications for decades. When one lives in Buf-
falo, for example, it doesn't really matter whether the headquarters is in New York
City or in Philadelphia; responsiveness is a matter of management performance, not
distance.

Furthermore, the public system for resolving problems through states' consumer
advocates and public utility commissions, remains the same after a merger.

Service quality. — Mergers also raise consumers' concerns about service quality.
"Will the new company respond to my questions and concerns promptly? Will I get
new services when they are introduced elsewhere? What if I have a complaint?" Al-
though it is natural to be afraid of the unfamiliar, I believe that mergers actually
promise to bring improvements in company operations, if anything. The merged
company should adopt the best management practices of the merging parties, purely
to maximize its business advantage. To fear that service quality will fall is to as-
sume that maintaining high customer service standards is an unnecessary expense
for businesses; anyone in the emerging competitive telecommunications industry
knows that this is not true.

Consumer loyalty is a key competitive advantage as companies try to protect their
core markets while entering new ones.

///. Conclusion

From a consumer perspective, the impact of a merger depends upon the particu-
lars of the companies involved. Mergers can strengthen the merging partners, im-

132

proving their financial position, creating economies of scale, and increasing their
customer base. These changes can lead to improved infrastructure, lower prices, and
a wider array of services and public interest programs for consumers. These benefits
are particular important when local exchange companies are involved in mergers,
because local exchange networks will continue to be the only provider of universal
access to telephone and data services for residences for many years to come.

Given these opportunities, policy makers should adapt two strategies as they con-
sider mergers in the telecommunications industry. First, they should do what they
can to assure that merging companies adopt the best consumer and public interest
practices of their merged partners. Second, they should encourage regulators to es-
tablish explicit service standards that any provider would have to meet, and then
follow through quickly and effectively on failures to meet those standards. This in-
cludes timely regulator responses to individual consumer complaints.

MFS Communications Company, Inc.,

Omaha, NE, September 25, 1996.
Hon. Orrin G. Hatch,
Chairman, Senate Judiciary Committee, Washington, DC.

Dear Senator Hatch: I wanted to respond for the record to testimony received
at the September 11, 1996 Senate Judiciary Committee hearing on mergers in the
telecommunications industry. During his oral statement, GTE's general counsel,
William Barr, sought to make the point that incumbent local exchange carriers are
already facing significant competition from new competitors. To support this claim
Mr. Barr stated that MFS Communications Company, Inc. ("MFS") provided local
telephone service to congressional offices and that Bell Atlantic, the local exchange
carrier for Washington, D.C., did not. "This is a very profitable center here, Capital
Hill * * * . The fact is. Bell Atlantic doesn't serve it. It was taken away by MFS".
This statement is just flat wrong and the Committee should understand the facts.

MFS Communications Company is a leading provider of communication services
for business. Through its operating companies, MFS provides a wide range of high
quality voice, data and other enhanced services and systems specifically designed
to meet the requirements of business and government customers. MFS is a publicly-
held company and its common stock is traded on the Nasdaq National Market under
the symbol MFST. MFS is headquartered in Omaha, Nebraska.

Contrary to Mr. Barr's averment, MFS is not the local service provider for CapitJiI
Hill. That service is in fact provided by Bell Atlantic. MFS provides no switched
service in Washington, D.C. and has only recently been given a certificate to do so.
MFS' subsidiary Metropolitan Fiber Systems of Washington, D.C, Inc. provides
some limited private line service and also provides some access service to specific
business and government customers but, as Mr. Barr should know, this is not local
exchange service and certainly is no substitute for the comprehensive local services
provided by Bell Atlantic.

MFS is proud to be one of the new competitors for local telephone service and we
hope to grow into a significant alternative to companies such as Bell Atlantic and
GTE but that will take time and a permissive regulatory environment. We believe
the Telecommunications Act of 1996 and the FCC's interconnection rules create just
such an environment and we look forward to offering true competition to incumbent
local exchange carriers in the years to come.

We appreciate the opportunity to correct the record and hope that this letter will
be included in the hearing record proximate to Mr. Barr's testimony.
Sincerely,

James Q. Crowe,
Chairman and Chief Executive Officer.

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